Illegal digital money lending applications, platforms under RBI lens

The Reserve Bank of India has tightened the scrutiny of illegal digital lending applications and activities. The working group from the central bank has recommended new legislation in order to contain entities that are lending without proper approvals.

A new working group was constituted by the RBI in January this year in order to look into the digital lending apps and platforms. RBI introduced the group due to the sudden surge of new players in the digital lending industry.

Problems with illegal digital lending

According to RBI, the digital lending platforms and applications should undergo a verification process by a nodal agency. The illegal lending agencies bypass it by directly approaching the end consumer.

-RBI has noted that the end-users are being harassed in order to recover money, some to the extent of committing self harm.

-These lending apps are repatriating money from India to their countries by avoiding proper taxes.

What can be done

The working group constituted by the central bank has suggested a few points which includes the setting up of a self-regulatory organisation of existing legitimate lending platforms. The group also emphasised on the requirement of storing user data within Indian boundaries.

RBI has issued the recommendations for the legislation on its website. The central bank is looking for inputs from the relevant stakeholders and public.

Here’s what RBI working group recommended:
1. Subjecting the Digital Lending Apps to a verification process by a nodal agency to be setup in consultation with stakeholders.

2. Setting up of a Self-Regulatory Organisation (SRO) covering the participants in the digital lending ecosystem.

3. A separate legislation to prevent illegal digital lending activities.

4. Development of certain baseline technology standards and compliance with those standards as a pre-condition for offering digital lending solutions.

5. Disbursement of loans directly into the bank accounts of borrowers; disbursement and servicing of loans only through bank accounts of the digital lenders.

6. Data collection with prior and explicit consent of borrowers with verifiable audit trails.

7. All data to be stored in servers located in India.

8. Algorithmic features used in digital lending to be documented to ensure necessary transparency.

9. Each digital lender to provide a key fact statement in a standardised format including the Annual Percentage Rate.

10. Use of unsolicited commercial communications for digital loans to be governed by a Code of Conduct to be put in place by the proposed SRO.

11. Maintenance of a ‘negative list’ of Lending Service Providers by the proposed SRO.

12. Standardised code of conduct for recovery to be framed by the proposed SRO in consultation with RBI.

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