RBI Throws a Data Collection Wrench in Fintech Lending Dreams

The Reserve Bank of India’s move to regulate digital lending in India has cast doubt on the business models of many such lending applications active in the space.

In the last two years, the number of applications offering online loans has risen sharply. Many of these – especially those that offer payday-style loans – operate outside the regulations and tend to collect significant personal data from a user’s phone.

The data can include media files stored on the device, contact lists, location data and even call logs. Such data has also been used by lenders to harass borrowers who fail to repay their loans. In many cases, debt collectors also call people on a borrower’s contact list and ask them to help them get their money back.

But the RBI’s recently issued digital lending guidelines may well put a stop to that by limiting the kind of information fintech platforms can collect. The guidelines state that regulated entities – banks and non-bank financial companies – should ensure that fintechs do not store personal information about borrowers beyond basic details such as name, contact details and address.

While this may help stem the threat posed by unregulated lenders, the restrictions could also play spoilsport for fintech lending platforms at large.

The guidelines will change things for fintechs that don’t run their own NBFCs, according to the founder of a four-year-old fintech lending firm. Fintechs with lending aspirations start their journey by being a marketplace to connect borrowers with lenders, this person said.

Once they build a base of enough users and have information about credit scores, income levels, occupations, and repayment history, they can use it to construct an underwriting engine.

This in turn helps them decide what type of borrower they prefer to lend to off their own balance sheet, explained the founder quoted above.

Therefore, fintech lending platforms leverage the balance sheets of their lending partners to understand borrower profiles, select a subset they want to lend to, and then make their own loans as and when they acquire a license to lend – usually via an NBFC.

This roadmap may require re-evaluation.

The current structure of the guidelines will necessitate fintechs to have their own NBFCs. Buy now, pay later providers such as Simpl operate without an NBFC license and others such as MoneyTap or Capital Float (now called axio) only use them for a limited portion of their loans.

The fintech entrepreneur cited above added that the capital requirements for acquiring an NBFC license are also likely to make it more difficult for new players to jump into technology-enabled lending.

Applying for an NBFC license requires a company to be registered and have a net owned fund position of at least Rs 2 crore. In the absence of customer data, it will also be difficult for fintechs to build their own guarantee engines, the founder said.

According to former RBI Deputy Governor R Gandhi, compliance by regulated entities has increased through these guidelines.