RBI recently warned users about unauthorized digital lending platforms that promise quick loans. The warning is timely, as a few bad outliers can undermine the importance of digital loans. MSME and consumer demand for credit is estimated to rise to more than $ 1 trillion by 2023, of which a third is expected to be digitally lent.

India now has 2,147 fintech startups and nearly 500 of them focus on digital lending. These platforms play an important role as they lend to the traditionally overlooked segment of banks. They have the ability to facilitate credit in the event of idiosyncratic banking issues and can also assist banks with alternative credit assessment processes that can broaden the base of loans.

Easier access to credit can also encourage formalization for MSMEs; up to 40% of MSME credit demand is still met outside formal channels. But it is clear that more needs to be done. Exorbitant interest rates, misuse of personal information, collectible horror stories are just a few of the things that have started to surface.

To begin with, a lending-focused coordinating body (like NPCI – National Payments Corporation of India – for digital payments) needs to be formed under the supervision of RBI. The organization – National Lending Corporation – should have three general mandates: to set guidelines for identifying individuals and businesses that are seriously underserved financially; standardize loan and collection processes; and improving the financial literacy of borrowers.

Identifying which individuals and businesses are in serious need of financial assistance is critical, as unreasonable loans intended for personal consumption are more often found in default as individuals overspend beyond their means. Since FinTech investments may be more prone to investor yield-seeking, the line of identification can often become blurry.

The constant refusals of banks and NBFCs, new credits, loans against a tangible requirement could be some of the signals used for identification. China is warning about what happens when borrowers have easy access to cash. Chinese households are now facing debt of $ 9 trillion, a quarter of which was loans to small businesses.

Standardization is essential to ensure stronger guardrails from a legal and compliance perspective. The apex body should set a cap on borrowing rates, call for methods to calculate interest transparently, institutionalize a central, technology-driven recourse mechanism, define the framework for the use of personal data, and put in place a collection process.

The collection process should undoubtedly be rigorous, but at the same time, debt collectors should also undergo the necessary training to deal with troubled borrowers. Hiring collection agents who work in the moonlight as club bouncers is not the best way to instill consumer confidence.

Financial literacy is vital because any social good that might have been felt by increasing access to financial products is compromised by lack of knowledge. The consumers of these loans are sometimes low income people and often have poor money management skills to manage their debts.

The organization should undertake a mass campaign to simplify the financial nomenclature and inform borrowers about the origin of the loan, the amount outstanding and the date of repayment. Borrowers should be fully aware of the underlying bank / NBFC lending to them, so that they can access the remedies available within the regulatory framework.

For India to become a $ 5,000 billion economy, loans must be made on a large scale so that businesses and individuals can grow. Digital lending is one way to do this. But like digital payments, digital lending also needs institutional support to find its mojo and help grow the economy. Let’s not spoil the opportunity.



The opinions expressed above are those of the author.



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