RBI report urges new nodal agency, SRO, law to ban illegal digital lending

Says balance sheet lending through DLAs should be restricted to entities regulated by RBI or entities registered under any other law for specifically undertaking lending business

The report by a working group formed by the Reserve Bank of India (RBI) on digital lending, including lending through apps and digital platforms, has recommended setting up of a nodal agency which will verify the technological credentials of the digital lending apps. It has also called for the creation of a self-regulatory organization, and bringing in legislation to prevent illegal lending activities.

“A nodal agency should be set up which will primarily verify the technological credentials of digital lending apps (DLAs) of the balance sheet lenders and loan service providers (LSPs) operating in the digital lending ecosystem”, the working group said in its recommendations. The nodal agency that the report has suggested will be tasked with maintaining a public register of the verified apps on its website.

It also said that balance sheet lending through DLAs should be restricted to entities regulated and authorized by RBI or entities registered under any other law for specifically undertaking lending business.

Further, the working group has suggested that self-regulatory organizations have to be set up covering the participants in the ecosystem. In the medium term, the working group has suggested that the central government may consider bringing in a legislation to prevent illegal lending activities by introducing the ‘Banning of Unregulated Lending Activities Act’.

When it comes to the technological aspects, RBI working group has said, each DLA should have publicly available policies regarding data storage, its usage and privacy and data should be stored in servers in India.

“Data should be collected from the borrower/ prospective borrower with prior information on the purpose, usage and implication of such data and with explicit consent of the borrower in an auditable way”, the report said.

It has also suggested that in the medium term an adaptive comprehensive regulatory framework for FIntechs and Techfins should be considered. “Algorithm used for underwriting should be auditable and lenders shall ensure that outputs from such algorithms are knitted in ethical AI design”, it said.

Further, the report has said, each digital lender has to provide a key fact statement in a standardised format including the Annual Percentage Rate.