Regulation of fintech – The Hindu BusinessLine
The fintech companies that have emerged in recent years have had a major role to play in helping retail borrowers overcome financial demands, especially during the pandemic. But many of these companies operate outside the regulatory realm, have used unethical and coercive tactics to collect dues and charge exorbitant interest and fees. In this backdrop, the regulatory framework for digital lending framed by the Reserve Bank of India is welcome as it addresses the concerns of borrowers in this segment. The framework strikes the right balance when it comes to allowing these digital lenders to continue operating, but under regulatory oversight. The central bank sets rules for regulated entities, including banks, and fintechs engaged by them, so that they can operate in a transparent manner with transactions routed through the banking system. Other regulators have been asked to draft similar regulations for entities not under RBI’s purview, and the Centre’s intervention is recommended to check illegitimate lending activities of digital entities not under regulatory oversight.
By designating fintechs as direct service providers or DSPs, the regulations now give this category the official status of DSAs or direct sales agents, often the link between banks and customers in the traditional world. Any loan-related transaction, whether execution of loan documents, disbursement or repayment, is now required to be carried out directly between the borrower and the regulated entities. This ensures that money and the paper trail are not left with the intermediary or DSP. In an effort to improve transparency and ensure customer confidence, the regulations state that the cost of the transaction must now be covered by the regulated entity and, as with any loan product, the all-inclusive cost of the loan should be disclosed. to the customer. The room to demand exorbitant fees from fintechs will now disappear. The issue of the customer’s credit score being damaged without their knowledge is also effectively addressed. RBI has accepted the working group committee’s recommendations to report all lending transactions done through DSPs to the credit reference agency. Therefore, regardless of whether a customer is on-boarded via a third-party fintech app or directly by the bank, the responsibility for checking the customer’s creditworthiness will rest entirely with the regulated entity. This also raises the issue of the evergreening of loans, which this newspaper highlighted in a recent report. The issue of privacy has also been thoroughly addressed. The RBI insists that data about transactions through the loan apps must be preserved in the country. Likewise, it has now been stipulated that the app cannot collect customer-related data without the customer’s consent and that the data collected must be needs-based. An audit trail of such data is also now required.
The only concern is that the tighter framework restricts the activities of the digital service providers, and many of them may even close shop, thereby closing off the source of funding for many private borrowers. Also these fintechs were preferred by many due to the convenience, fast payout and faster processing. Now the waiting time for credit can increase and will involve cumbersome paperwork. The Central Bank needs to see how it can offer alternative channels to provide quick loans to small-ticket borrowers so that their needs are also met.
Published on
12 August 2022
