Why in news?

RBI has prohibited four non-banking finance companies (NBFCs) from approving and disbursing loans.

These four NBFCs are: Asirvad Micro Finance Ltd (backed by Manappuram Finance), Arohan Financial Services Ltd, DMI Finance (supported by Mitsubishi), and Navi Finserv (founded by Flipkart co-founder Sachin Bansal).

This action was taken due to their violation of several regulations, including charging excessively high interest rates. The issue highlights a broader concern, as numerous NBFCs and lending apps, both legal and illegal, are reportedly engaging in predatory loan pricing and harsh recovery practices.

What’s in today’s article?

• Digital lending
• Need to regulate digital lending
• Steps taken by to regulate digital lending
• RBI Bars Four NBFCs

Digital Lending

• Digital lending is the process of availing credit online.
  • It involves lending through web platforms or mobile apps, utilising technology in customer acquisition, credit assessment, loan approval, disbursement, recovery and associated customer service.
• Its increased popularity amongst new-age lenders can be attributed to expanding smartphone penetration, credit range flexibility and speedy online transactions.
• It includes products like Buy Now, Pay Later (BNPL), which is a financing option (or simply a short-term loan product).
  • BNPL allows one to buy a product or avail a service without having to worry about paying for it immediately.

Need to regulate digital lending

• Illegal lending apps in India
  • A report by the RBI, published in 2022, says that India has the maximum number of digital loan apps in the world. The report has marked 600 loan apps illegal.
• Low-income and financial unsavvy Indians are the targets
  • These apps mostly lend small sums between Rs 2,000 and Rs 10,000, targeting low-income and financial unsavvy Indians.
  • These loans come with huge interest rates and extortionate terms and conditions, to which borrowers have no recourse.
  • This increases the vulnerabilities of these borrowers by exploiting the unmet need for credit.
• Harassment by recovery agents
  • These apps demand access to contact lists and use harassing techniques for repayment, including abusive calls, messages, and even morphed images used to extort borrowers.
  • In extreme cases, victims have faced sexual harassment, with incidents leading to tragic consequences such as suicide.
    • In 2021, at least six people committed suicide in Hyderabad alone due to harassment by agents.
• Breach of privacy
• With just one tap, borrowers allow these lenders to access everything on their phone. The lender also get access to information such as PAN and Aadhar details.
• The apps, on the pretext of advancing a loan, obtain all information from the customers' phones which could later be used by the company to perpetrate some other financial crime.
• Acts as a tool for money laundering
  • More than a hundred apps related to loans, betting and dating successfully collected thousands of crores in revenue and repatriated them to China.
  • This was revealed an investigation conducted by the Enforcement Directorate (ED).

Steps taken by to regulate digital lending

• Role of RBI strengthened to address the issue
  • RBI has been designated as the nodal department for dealing with complaints against unauthorised digital lending platforms as well as mobile apps.
  • In August 2022, RBI issued the first set of guidelines for digital lending in order to combat illegal activities by certain players.
  • These guidelines aimed at protecting customers from unethical business practices, such as mis-selling, breach of data privacy, unfair business conduct and charging of exorbitant interest rates adopted by digital lenders.
• Multi-agency crackdown on illegal loan apps
  • In September 2023, Union Finance Minister chaired a meeting with appropriate officials and launched a multi-agency crackdown on illegal loan apps.
    • To curb the menace of illegal loan apps, the RBI has been asked to prepare a ‘whitelist’ of legal loan apps.
    • At the same time, MEITY has been tasked with ensuring only such legal applications (list prepared by RBI) are available on app stores.
• Registration of payment aggregators
• The RBI has been entrusted to ensure that the registration of payment aggregators be completed within a time frame.
  • A payment aggregator acts as a third party responsible for managing and processing merchants' online transactions.
• The RBI has also been entrusted with monitoring ‘mule or rented’ accounts that may be used for money laundering.
• RBI has further been asked to review and cancel dormant non-banking finance companies (NBFCs) to avoid their misuse by such app operators.
• Public Repository for Digital Lending Apps
  • To curb illegal lending activities, the RBI has announced the creation of a public repository of digital lending apps (DLAs) deployed by regulated entities.
  • This repository, available on the RBI’s website, will help borrowers verify whether a lending app is associated with a legitimate regulated entity, aiding in the identification of illegal apps.

RBI Bars Four NBFCs

• About the news
  • The RBI has barred four non-banking finance companies (NBFCs) from sanctioning and disbursing loans.
  • The action was based on violations related to their pricing policies, including excessive interest charges that did not adhere to RBI regulations.
  • While RBI has no upper limit on loan interest rates, it mandates transparency, which these NBFCs failed to comply with.
• Regulatory Warnings Ignored
  • The RBI has consistently urged regulated entities to adopt fair, transparent, and reasonable pricing practices, especially for small loans.
  • Despite these warnings, usurious practices continued to surface during onsite examinations and offsite data analysis.
  • NBFCs were found violating regulations on income assessment for microfinance loans, failing to comply with Income Recognition & Asset Classification (IR&AC) norms, and violating disclosure requirements on interest rates and fees.