RBI considers allowing lenders to lock borrowers' phone after loan default

Adequate safeguards key for customer protection

With a surge in demand for small-ticket loans from customers who are new to credit, the Reserve Bank of India is considering allowing lenders to use “device-locking technology” (DLT), by which they can lock the borrowers’ smartphone in the case of a default.

 

For such customers, who are mostly from the low-income category, traditional collateral or credit checks are not available. At the same time, credit demand from such categories is rising, particularly smartphone financing.

 

Allowing banks and non-banking financial companies to lock mobile phones can enable them to manage risk and get repayment without costly repossession. Remote locking acts as a digital collateral substitute, and is also expected to instill financial discipline among borrowers.

 

At the same time, the regulator is conscious of the fact that such practices raise concern and the use of these methods comes with significant non-financial risk to borrowers.

 

In this case, the borrowers’ personal data becomes de facto collateral. If their smartphones are locked, they could lose personal data because they are not only denied the use of the phone but the data stored in the device like contacts, work-related apps, children’s education material, among others.

 

For gig workers or small businesses, not being able to use the phone would mean loss of access to navigation tools, customer information, etc which could affect their earnings and hence ability to repay the loan. Moreover, there is no grievance-redress mechanism for borrowers if the phone is erroneously locked.

 

There are concerns over risk assessment by lenders. If lenders are allowed to lock phones, the focus of financiers can shift from affordability to enforceability. Lax underwriting can result in a rise in bad loans.

 

At the same time, there are compelling arguments in favour of allowing device locking, though with adequate safeguards.

 

It is argued if such collateral is prohibited then it should be applicable for all other collateral — for example, loans against gold jewellery and housing loans.  Should lenders be not allowed to take possession of a house in the case of a default since having a roof is basic and essential for a household? It is also argued that a borrowers’ internet connection is deactivated in the case of non-payment of bills or if recharge is due.

 

Lenders are expected to do a proper appraisal and have an incentive to do so and assess borrowers’ repayment capacity. Taking collateral does not guarantee the full loan is repaid. A bad loan, even with collateral, increases credit cost for the bank — higher recovery costs and higher losses due higher defaults.

 

According to sources, the regulator is considering safeguards. First, phone locking should be accompanied by a clear and informed consent and notice should be given after a default. Lenders should ensure that there is no breach of data privacy and no data should be accessed or extracted from the device by the lender other than what is required to facilitate device locking in a graded manner.

 

There are a few positives if such a practice is allowed, it is argued. First, it lowers the entry barrier to formal credit for small ticket, high-utility items by reducing the lender’s recovery risk. It also avoids public, visible enforcement actions and the social stigma attached to them, an aspect that matters for low-income borrowers whose livelihoods depend on their reputation in tight local markets.

 

According to bankers, regulators should permit innovations that expand access while ensuring borrower’s dignity, privacy is maintained. And importantly, there should be a proper grievance redressal mechanism in place. (End)