Lately, digital lending platforms have gained traction as they provide easy access to credit online and have proven to be useful in difficult times, especially after the Covid outbreak, for those looking for instant loans. But there have also been a growing number of consumer complaints against these platforms for mis-selling, data privacy breaches, and illegal conduct.
To protect clients from widespread unethical practices, the Reserve Bank of India (RBI) has released the ‘Task Force Report on Digital Lending, Including Lending Via Online Platforms and Mobile Apps “. The report contains recommendations and suggestions from the RBI and the government such as setting up a self-regulatory body to oversee the functions of industry players and to standardize certain operations. It is open for public comment until December 31, 2021 by email.
We take a look at the five key areas that make digital lending application customers vulnerable and how the report seeks to better protect borrowers on these fronts.
Unauthorized loan applications
If you go for unauthorized digital loan applications, you may be faced with unreasonable loan terms.
To have some responsibility, currently, to be a digital lender, one must be associated with a bank or non-bank finance company or comply with the laws on lending money in the respective state in which the services are provided. But the report goes even further.
Proposal: First, it suggests that digital lending should be limited to only those entities that are either regulated by the RBI or registered under any other regulatory authority. Currently, some digital loan applications operate as intermediaries between the customer and the financial institution. Gaurav Jalan, founder and CEO of mPokket and a member of the Fintech Association for Consumer Empowerment, says there is still ambiguity about what kind of regulation intermediaries will be subject to.
One of the important changes that would occur if the report becomes actionable is the integration of the entire digital lending space into the regulatory framework. Direct regulation will serve as an additional layer of oversight that will prevent applications from unauthorized activity.
The discussion paper also suggests creating an independent body – Digital India Trust Agency (DIGITA), which will verify digital lending applications before they are made public. Not only that, the report also recommends the creation of a Self-Regulatory Organization (SRO), an industry association that will establish a code of conduct and provide a mechanism for resolving customer complaints.
High and hidden costs
Digital lending apps typically charge higher interest rates than conventional banks and NBFCs. This is in part due to the additional risk these players take by serving users who may not have a proper credit history.
In addition to the interest rate, there could be processing fees and other costs. Credible money lending apps disclose most of these details transparently in the “About App” area of the App Store and mention them in the loan agreement as well. But many others don’t.
Proposal: To hold the reins of apps that don’t transparently disclose and misrepresent interest rates, the document recommends that each lender provide a Key Fact Statement (KFS) in a standardized format for all digital lending products.
Especially in the case of short-term consumer credit (STCC), the central bank can establish standard definitions for the cost of tDCS / digital micro credit as an annual percentage rate (APR). This would allow disclosure of all costs in a clear and understandable manner.
Another important recommendation has been that a certain day cooling off / research period should be given to clients to exit digitally obtained loans by paying proportional interest charges without any penalties.
Data privacy breach
Most digital apps seek to access your contacts, gallery, and other app details on your mobile phone, during setup, to create a borrower’s credit profile. There have been instances where these players have violated data privacy.
Proposal: The report recommends that the application collect only the minimum personal data required of the borrower after indicating the use of each data / access authorization obtained. The borrower should have the option to revoke the consent given to the collection of their personal data and, if necessary, have the application delete / forget the data.
The key point here is that lenders must grasp the economic profile of the borrower and assess the consumer’s creditworthiness in a verifiable manner.
In addition, he also talks about the mandatory submission of loan transaction information by digital lenders to credit reporting companies (CICs) at a shorter interval compared to conventional reports. This will ensure less reliance on alternative data for financial consumers, as more of them would develop formal credit histories on their own.
Unacceptable recovery methods
There have been cases in the past of unacceptable and overbearing collection methods by lenders.
According to the RBI’s “Code of Fair Practices Guidelines for Lenders,” when it comes to loan collection, lenders should not resort to undue harassment, such as constantly disturbing borrowers at irregular hours and using their strength. muscle to collect loans.
Proposal: Despite this, in the face of mounting concerns about unethical collection practices, the discussion paper suggests standardizing the code of conduct for collections, which is to be framed by the proposed SRO.
The OAR must maintain a “negative” list of agencies involved in unreasonable collection means and the lender must periodically ensure that the collection agency is not mentioned in the list.
Poor handling of grievances
As per current guidelines, the loan agreement should clearly state the options available to the borrower to address any grievances – be it customer support, bank / NBFC support, or the redress mechanism. of the regulator.
Many users complain about poor customer support in user reviews for most of these money lending apps. Once the RBI announced the RBI Sachet portal (https://tinyurl.com/rbiportal) for filing complaints, the number of complaints filed increased significantly, according to the report.
Proposal: The main recommendation in this regard is that digital lending applications should appoint a nodal manager who is competent enough to handle FinTech-related issues with clients as well as regulators, SROs, law enforcement agencies, etc. . The coordinates of the nodal officer would be displayed. on the digital loan app website.
In addition, like the banking ecosystem and NBFC, he suggested defined deadlines, an escalation mechanism for any grievance.