Officials from the Ministry of Electronics and Information Technology (MeitY) recently met with officials from the Ministry of Finance and the Reserve Bank of India (RBI) to work out strategies to curb illegal lending apps. As reported, MeitY has mooted additional KYC-like procedures for regulated entities (REs) such as banks and non-banking financial companies (NBFCs) to apply to their digital lending business partners. This discussion was prompted by the growing threat posed by illegal loan apps. A BBC documentary reveals the social engineering and aggressive recovery tactics they employ. At least 60 suicides have been directly linked to predatory lending. It is worth immediate intervention.
However, a holistic approach could prove more effective than piecemeal efforts like KYC, and there should be no ambiguity about the RBI’s nodal role in digital financial supervision. not. Last year, RBI’s working group on digital lending had proposed the creation of an independent multi-stakeholder body called the Digital India Trust Agency, whose primary role would be to validate digital lending apps. It will also maintain a public registry of verified apps, monitor them, and exercise the power to revoke authorizations if necessary. However, this body never saw the light of day. However, while rolling out the digital lending guidelines, the RBI took into account other suggestions of the working group. The central bank also got involved with app stores to weed out illegal lenders. However, these actions shifted managerial responsibility to other players and took RBI away from the direct manager.
Banks and NBFCs, which serve as major sources of financing for these app businesses, are undoubtedly natural allies for the RBI in financial regulation. Similarly, mainstream app stores with the computing power and tools to monitor cybersecurity and privacy can collaborate in digital surveillance. In an ideal world, entities that are “not authorized to lend” should not appear in app stores. However, the RBI needs to act proactively and play a more direct role in supporting these stakeholders.
First and foremost, the RBI should mandate proof of a standardized and comprehensive partnership between digital lenders and REs. The current direction of RE having to publish a list of (partner) apps on her website is vague at best. As a result, app stores take on more responsibility than necessary. Given the sheer volume of apps, achieving perfect screening is a difficult task. For example, Google Play reveals that it scans an astonishing 125 billion apps for security risks every day. Equally concerning is the possibility that app stores will make mistakes in the review process and ban valid apps.
Secondly, RBI must ensure that the certificate of partnership cannot be tampered with. His simple KYC steps for digital lending apps won’t stop the clever bad guys from imitating the good guys. And app stores cannot license or unilaterally authenticate the legitimacy of potential lenders. All kinds of certificates and identification documents can be forged. With over 10,000 banks and his NBFCs, the scope for misrepresentations regarding lender-app affiliations is vast.
This is where blockchain technology comes into play. At its core, blockchain is a distributed ledger of transactions that is transparent and immutable. This inherent security makes it an ideal solution for sharing and validating partnership certificates. The basic idea is that the RE can issue standard certificates to partner digital apps and assign her identity to each certificate. This ID can be tagged and tracked within the blockchain network. RBI will operate such a private blockchain and allow REs to act as active participants or nodes in this network. This provides more, albeit limited, access to actors such as app stores notified by MeitY.
Moreover, RBI needs to widen its horizons and invite other entities to participate in this exercise. Specifically, public institutions that derive their powers from statutory instruments separate from the RBI Act should participate. Some state-level institutions allow loans and also require contributions to blockchain networks if they are related to digital apps.
Finally, while these steps may work for notified app stores, consumer awareness is also critical, as borrowers may sideload apps from the open web. Achieving true digital safety requires a whole-of-society effort, reinforced by institutional mechanisms. Given the importance of consumer awareness, the Working Group on Digital Lending emphasized the need to foster a “responsible borrowing culture” in parallel with promoting responsible lending. Indeed, there is an urgent need to focus on the mechanisms of financial fraud through large-scale public awareness campaigns. “Jago Grahak Jago.”
When considering the challenges of digital lending, it is essential to recognize the progress India has made in the digital finance space under the RBI’s watch. The growth in retail payments in the country is staggering, with 46% of real-time payments made worldwide in 2022 occurring in India. The digital lending sector has also seen impressive growth, with nearly 73 million loans disbursed in 2022-2023. While these achievements highlight impressive progress in financial inclusion, the RBI cannot avoid regulating new digital services. To protect the people of India, we must abandon inertia and position ourselves as a nodal regulator.
These are the author’s personal views.
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