RBI monetary policy update
Dec. 9, 2023

Why in news?

  • The Reserve Bank of India's Monetary Policy Committee (MPC)kept the repo rate unchanged for the fifth time in a row at 6.5 per cent.
  • While announcing various steps, RBI also said that it will lay down guidelines for web aggregators of loan products to bring more transparency to digital lending.

What’s in today’s article?

  • Digital Lending
  • News Summary

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 and said that the central bank.
  • 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
    • Such apps are dangerous as the harassment by recovery agents have driven many to suicide in the recent past.
      • 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

  • 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 were issued in response to the recommendation of the Working Group on Digital Lending (WGDL).
  • 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.
    • 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.

News Summary: RBI monetary policy update

  • The RBI’s MPC unanimously decided to keep the repo rate unchanged at 6.5 per cent on worries over higher inflation amid uncertain food prices.

Key highlights of the announcements

  • Raises GDP growth forecast
    • It revised upwards the real GDP growth forecast to 7 per cent for FY’24 from 6.5 per cent.
  • Inflation projection
    • The inflation projection for FY24 has been kept unchanged at 5.4 per cent.
    • RBI said that although there has been broad-based easing in core inflation, risks to food inflation remain.
    • It added that food inflation may lead to an uptick in inflation figures in November and December.
  • UPI payment limits
    • RBI raised the United Payments Interface (UPI) payment limits for hospitals and educational institutions to Rs 5 lakh from Rs 1 lakh per transaction.
    • RBI also decided to lay down guidelines for web aggregators of loan products to bring more transparency to digital lending.
  • Increased limit on recurring e-payment mandates
    • The RBI has increased the limit on recurring e-payment mandates for credit card and insurance premia payments as well as mutual fund investments to ₹1 lakh from the current limit of ₹15,000.
      • E-mandate is a digital payment method to virtually enable and authorise merchants to collect recurring payments through debit or credit cards.
      • Under the existing framework, an additional factor of authentication (AFA) is currently required for recurring transactions exceeding Rs 15,000. Now it stands removed for transaction up to 1 lakh.
  • Commercial sector growth
    • The RBI said the buoyancy in public sector capex (capital expenditure), above-average capacity utilisation in manufacturing and domestic demand will help boost growth.
    • The total flow of resources to the commercial sector stood at Rs 17.6 trillion during the current financial year, significantly higher than Rs 14.5 trillion last year.
  • Public sector capex
    • Despite weakness in external demand, exports were positive in October.
    • Private consumption should gain from rural demand, manufacturing and buoyancy in services.
    • The healthy balance sheet of corporate, business optimism and government infrastructure spending will boost public sector capex.
  • On Forex reserve
    • Foreign exchange reserves at $604 billion provide a strong buffer against global spillovers.
  • On Rupee
    • The rupee has exhibited low volatility compared to its emerging market peers in 2023, despite elevated US treasury yields and a stronger US dollar.
    • This reflects the economy’s improving fundamentals.
  • RBI to offer cloud storage services as part of digital public infrastructure
    • RBI is working on establishing a cloud facility for the financial sector in India as it looks to enhance the security, integrity and privacy of financial sector data.
    • The regulator is taking the same approach as the government has done with setting up ‘digital public infrastructure’ (DPI).
      • The underlying technology is built by the government, and is later outsourced to the private sector for developing various applications.
      • The biometric identity programme Aadhaar and United Payments Interface (UPI) are key examples of DPI.