And yet, RBI has no doubt that digital lending is the way forward. A working group of the RBI has concluded that lending through physical mode may be rendered obsolete in the not-so-distant future. Therefore, it makes sense for banking transactions to take newer shapes as purchases, payments and record-keeping go digital. The growth in digital lending over last five years, when other enabling factors and supporting infrastructure were still evolving, has been phenomenal and it is time for digital lending to operate in full swing, enabled by support and participation from all stakeholders, the working group has felt.

Explaining the background to the working group’s task, the report notes that there have been unintended consequences on account of greater reliance on third-party lending service providers. These include mis-selling to unsuspecting customers, concerns over breach of data privacy, unethical business conduct and illegitimate operations. While the current share of digital lending in overall credit pie of the financial sector is not significant for it to affect financial stability, the growth momentum has compelling stability implications, the group points out. But the group agreed that ease of accessing digital financial services, technological innovations and cost-efficient business models will eventually lead to ‘meteoric rise’ in the share of digital lending in the overall credit.

The group has pointed out in its report that the larger issue here is protecting the customers from widespread unethical practices and ensuring orderly growth. As has been seen during the pandemic-led growth of digital lending, unbridled extension of financial services to retail individuals is susceptible to a host of conduct and governance issues. Mushrooming growth of technology companies extending and aiding financial services has made the regulatory role more challenging. In view of the ease of scalability, anonymity and velocity provided by technology, it has become imperative to address the existing and potential risks in the digital lending ecosystem without stifling innovation.

Further, on a larger canvas and on a medium to long term horizon, digital innovations along with possible entry of BigTech companies may alter the institutional role played by existing financial service providers and regulated entities. A fallout of this may get reflected in blurring of regulated and unregulated financial institutions and activities. The group feels such developments spurred by mere commercial considerations would pose regulatory challenges in ensuring monetary and financial stability and in protecting interests of the customers.

The group has accordingly made recommendations and suggestions that are aimed at addressing issues posed by digital evolution of the financial activities, products and institutions while ensuring ways to reap the benefits of digital innovation at the same time. It has recommended the creation of a nodal agency that will primarily verify the technological credentials of digital lending apps of the lenders and lending service providers operating in the digital lending ecosystem. It will also maintain a public register of the verified apps on its website.

The other recommendations include restricting app-based lending to entities regulated and authorized by RBI or entities registered under other laws specifically relating to lending business. Further, it has suggested the creation of a self-regulatory organisation to cover all the participants in the digital lending ecosystem.

Based on data received from a representative sample of banks and non-banking finance companies (NBFCs) — representing 75 per cent and 10 per cent of total assets of banks and NBFCs respectively as on March 31, 2020 — it has been observed that lending through digital mode relative to physical mode is still at a nascent stage in case of banks. i.e., Rs 1.12 lakh crore via digital mode as against Rs 53.08 lakh crore via physical mode. But, the overall volume of disbursement through digital mode for the sampled entities has exhibited a growth of more than 12 times between 2017 and 2020. (IPA Service)