• RBI’s digital lending norms likely to raise compliance cost for fintechs
  • Regtech firms can ease compliance burden through automation

India is one of the fastest-growing fintech markets in the world. According to a study by EY, the fintech sector is going to touch a combined revenue of $200 billion by 2030. Home to more than 20 unicorns, India’s fintech adoption rate is among the fastest in the world. However, such digitalisation of the financial services sector has also led to many instances of misuse and fraud. Especially, the problem is acute in digital lending segments. In recent years, several digital lending apps have taken gullible lenders for a ride. Data misuse, extortion, exorbitant interest rates, and other such instances have come to the fore on regular basis. Police complaints have been filed by borrowers against many instant loan apps. The investigation has also found links to Chinese citizens who are operating several such loan apps. Against this backdrop, recent guidelines by the Reserve Bank of India are welcome steps. These norms will go a long way in protecting borrowers from such spurious loan apps. Notably, these norms are also applicable to banks and NBFCs that are betting big on their digital lending apps or collaborating with fintech players to improve market share.

Digital Lending Norms to Promote Healthy Growth:

The guidelines of RBI are both exhaustive and detailed. In a bid to protect client-specific personal information, the central bank has put restrictions on the usage of customers’ data. According to the guidelines, a lender can store information such as the name, address, and contact details of the customer that are essential for the processing and disbursing of the loan along with its repayment. Beyond such basic information, it now disallows any more information to be stored by digital lending apps. Similarly, any biometric information of a borrower can’t also be stored now. Moreover, it puts substantial information on access to mobile phone resources of borrowers or applicants.

With these guidelines, the RBI has also mandated that all digital loans must be disbursed and repaid through bank accounts of regulated entities only. There will be no pass-through of loan service providers (LSPs) or other third parties. It also makes it mandatory any customer data collected by digital lending apps should have clear audit trails and can only be done with the explicit consent of the borrower. Moreover, digital lending apps have to provide clear information on the origination and destination of loans apart from providing APR (Annual Percentage Rate) calculations to consumers. With the new norms, lenders like banks and NBFCs have to be more careful in their partnerships with loan services providers (LSPs) and fintechs.

While these norms will definitely make the digital lending ecosystem safe and secure with robust safeguards for borrowers, fintechs will definitely see a rise in their compliance costs. For instance, restricted access to data from a customer’s mobile phone will require digital lending apps to look for other avenues for gauging the creditworthiness of prospective clients. Restriction on data privacy will add to fintech costs as these entities invest in more technology solutions for ensuring the same. Fintechs also need to put in place adequate and transparent risk management controls. To comply with these new regulations, fintechs have to invest more time, energy, manpower, and money going ahead.

Technology Can be a Great Enabler:

Despite the rapid growth of the Indian digital lending segment, competition is also getting intense. More players are joining the race as customers find these digital apps convenient for getting a loan. This is leading to pressure on profitability. Amid such an environment, hiring more people for managing the compliance burden will further impact the bottom line. In this perspective, technology-powered solutions that automate the new compliance requirements can save costs for fintechs. AI, ML, and data analytics-powered solutions can make the compliance process easy by sending all loan details to customers by generating those documents instantly. Similarly, regulatory technology solutions can keep an eye on possible breaches of client information and give early warning for remedial actions. Keeping the audit trail of loan origination to closure requires technological intervention that can store this information efficiently. Though new-age fintechs are technology-savvy, building an in-house team for compliance will not prove to be cost-effective. Therefore, the right technology partner operating in the regtech space can enable fintechs and traditional financial services players to be compliant with all new regulations.

India is at the cusp of witnessing exponential growth in its fintech ecosystem in the coming years. However, such growth has to be healthy and orderly. Therefore, fintechs and major financial services institutions have to build their technological heft for ensuring financial stability. Hearteningly, technology can play a critical role in all aspects of this journey.

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