Lending transparency

Vetting of apps should not affect innovation

There are pros and cons to the Reserve Bank of India (RBI) undertaking an exercise of vetting “loan apps”. The central bank is obviously the agency to check if a given app complies with rules and regulations set in this regard. But if poorly handled, this may raise a possible barrier against competition. Union Finance Minister Nirmala Sitharaman has asked the RBI to check digital loan apps and compile a “whitelist”. The Ministry of Electronics and Information Technology (MEITY) has been asked to coordinate with the RBI and service providers such as Google Play and Apple App Store to ensure that only loan apps on the RBI whitelist are available for download. The finance ministry’s concerns include applications offering loans to vulnerable, tech-illiterate people, and low-income groups at exorbitant interest rates with hidden processing fees and charges. Lenders also use predatory loan recovery practices involving blackmailing and criminal intimidation. In addition, there is the possibility of money laundering and tax evasions.

All these are serious concerns. One could also add macro concerns about the growing incidence of financial indebtedness across households. The RBI data shows the financial indebtedness of households increased from 38.5 per cent of gross domestic product in June 2020 to 40 per cent by March 2021. The corporate data reported by listed credit card issuers and banks indicates indebtedness rose even further through 2021-22. The RBI can address some of the issues mentioned by the finance ministry. It could, for instance, create a checklist of information pertaining to interest rates, fees and other charges, all of which should be clearly published by any loan app. It could set ceilings on interest rates and impose penalties for violations. In the absence of a data-protection law, most corporations also attempt to collect as much data as possible. The RBI could check the apps in question don’t collect more data than strictly necessary to generate credit scores and process loans, and that all such data are collected with granular permissions, and not shared with other entities. It could publish such data-collection standards in the interests of public safety. It may, working in harness with the Income Tax Department and other agencies, be able to flag cases of possible money-laundering.

To be sure, the RBI may not be able to really prevent the use of strong-arm tactics to extract money from borrowers. Sadly, such methods are often used by reputable institutions, including scheduled commercial banks, due to the tardiness of loan recovery through normal processes. It’s up to the executive and the judiciary to ensure citizens are not harassed, while accelerating processes of loan recovery. On its part, the MEITY could coordinate with Apple and Google to ensure non-compliant apps are kept off these stores. But there are many ways to “side-load” apps. It is easy for any unscrupulous lender to send a link that will bypass Google Play and Apple App Store. Preventing this involves a process of educating potential borrowers to avoid side-loading. However, the RBI must ensure that it does not exclude legitimate players by setting complicated, opaque standards for whitelisting. It must also ensure that its process of approval (or rejection) is prompt and offer reasons to the applicant in cases of refusal. The process should not be allowed to stifle competition and innovation.