Fin Or Tech? RBI Wants To Draw A Line

The Reserve Bank of India's internal working group's recommendations on digital lending seek to a draw a line between finance and technology, pushing much of this credit on the balance sheet of regulated entities. While this may impact the pace at which digital lending is rising, it will help in more manageable growth of the segment, said analysts and industry executives.The recommendations released on Nov.18 say that digital lending should happen via verified apps. It also recommended that balance sheet lending should happen only through regulated entities and risk sharing with loan service providers be curtailed. The group also suggested that buy-now-pay-later credit be treated as balance sheet lending.The proposals appear to be largely constructive for the digital lending space, said Anand Dama, analyst at Emkay Global Financial Services. 'That said, the introduction of regulations may moderate the growth rate of Digi-loans,' Dama added..The working group recommended putting a stop to a popular lending structure termed as first loss default guarantee (FLDG). Under this, a loan service provider (LSP) offers first loss guarantee up to a pre-decided percentage of loans generated by it.'From the LSP’s perspective, offering FLDG acts as a demonstration of its under-writing skills whereas from the lender’s perspective, it ensures platform’s skin in the business. For all practical purposes, credit risk is borne by the LSP without having to maintain any regulatory capital,' the working group said in its report.According to Akshay Mehrotra, co-founder and chief executive officer of EarlySalary, a payday lender registered as a non-bank lender, by creating these synthetic structures, tech companies are masquerading as lenders or financial institutions. 'It's important to understand who is the lender and who is the loan service provider,' he said.Gaurav Chopra, co-founder of IndiaLends, agrees.The entire process of due diligence has been skipped by these apps via the FLDG route, said Chopra, explaining that banks and NBFCs have to adhere to strict regulatory rules and are subject to oversight. 'While it's supposed to be a cash-flow/liquidity solution, it also helps companies share risk.'Ramaswamy Iyer, founder and chief executive officer of Vayana Network, a trade finance company, said these structures were allowing apps to bypass the need for a lending licence. Only NBFCs and banks are expected to lend, while fintech firms are supposed to be middlemen who connect the borrower and lender, he said..I believe these companies were trying to overtake conventional banks on a two-lane road using the opposite lane. They may get there faster, but the risk is exponentially higher.Ramaswamy Iyer, Founder & CEO, Vayana Network.The working group has also suggested, albeit not recommended, that buy-now-pay-later credit be only given on-balance sheet. All such lending should be reported to credit bureaus, the committee suggested. Until now, while registered lenders offering BNPL loans were reporting them to credit bureaus, others were not.The marketing of BNPL pitches it as a convenience, but it's just another way of extending credit, said Chopra of IndiaLends. 'While a small purchase may not seem much, it has the potential to uproot one's finances at the end of the month.'As such, the working group may be justified in suggesting that these loans be tagged as credit and be reported to bureaus.'BNPL has become a buzzword in the finance industry and is on the verge of explosive growth, with payment companies jumping into the ring, apart from private banks/NBFCs,' said Dama. The product, he said, is mainly pitched to uncarded and credit-deprived borrowers, exposing them to debt trap and predatory pricing. .The RBI group recommends that consumer BNPL should be treated as a traditional credit product, and thus subjected to credit bureau reporting by fintechs, which may hurt early stage new-to-credit borrower score as well as growth momentum of few fintechs.Anand Dama, Analyst, Emkay Global Financial Services.The working group also recommended certain baseline technology standards as a pre-condition for offering digital lending solutions. It said data collection can be done only with prior and explicit consent of borrowers with verifiable audit trails. Algorithmic features used in digital lending must be documented to ensure necessary transparency.'The new suggestions, along with the soon-to-come data protection laws, are aimed at creating a consent-based mechanism which shows the user exactly what will be collected and how it will be used,' said Anurag Jain, founder and executive director at KredX, a working capital lender. 'RBI has already cracked down on the payments industry for data localisation, we can expect the same to happen here as well.'According to a report by Kotak Institutional Equities dated Nov. 22, the extent of permissions sought by payment and digital finance apps differs.Paytm has maximum access to the user's phone as it seeks 44 different kinds of permissions. This includes requests like 'modify system settings', 'uninstall shortcuts', and even 'add or remove accounts'. Bajaj Finserv and PhonePe take 34 permissions each. BNPL-centric products like Cred and ZestMoney seek permission for 13 to 22 types of access. Some of these apps have deep access to all data on a user's phone and, in many cases, recovery agents have abused this access, said Jain. .The purpose and end-use of all the data collected, like messages, contacts, usage history, etc. should be clearly defined. We're now moving into a consent-based regime where the user has all the controls.Anurag Jain, Founder, KredX

Fin Or Tech? RBI Wants To Draw A Line

From clamping down on risk sharing to suggesting oversight of tech, what will be the impact of the RBI panel's recommendations?

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