Banks, NBFCs May Be Asked To Monitor Digital Lenders More Closely
A security guard stands by a Reserve Bank of India (RBI) logo in the RBI building in Mumbai, India. (Photographer: Karen Dias/Bloomberg)

Banks, NBFCs May Be Asked To Monitor Digital Lenders More Closely

The Reserve Bank of India may put the onus of monitoring digital lenders on banks and non-bank finance companies that work with these entities, according to industry representatives who have been in discussions with the regulator.

The RBI is currently in the process of reviewing the digital lending ecosystem after reports of malpractices surfaced last year. A report of a working group set up for this purpose is due shortly.

The working group is considering a structure where the entities regulated by the RBI will be held liable if third-party mobile applications flout lending norms, three people familiar with the matter told BloombergQuint. The RBI may mandate frequent checks by regulated entities into the technology infrastructure and operations of intermediaries they sign up with to provide unsecured loans, the people said.

Banks and non-bank lenders may have to draw up board approved policies before they sign on digital apps, two of the people quoted above said. These policies would be created keeping in mind the RBI’s fair practices code.

In addition, digital lending apps will be required to transparently disclose interest rates being charged, the people quoted above said. In case of recoveries, norms applicable to direct selling agents of banks could be extended to these third party applications as well. Under the DSA norms, the RBI requires banks to ensure that “uncivilized, unlawful and questionable behaviour or recovery processes” are not employed by the agents.

If digital loan apps end up flouting norms and employ predatory lending and recovery practices, the lenders backing these apps could be held responsible and face action, the people quoted above said.

One of the three people quoted above said the working group’s recommendation may also include creation of a new self regulatory organisation to help lenders better monitor digital lending applications. This entity may also be responsible for monitoring usage of data by the lending applications.

The Economic Times first reported on Wednesday that the working group may place more onus on banks and NBFCs to monitor digital loan apps.

The RBI did not immediately respond to queries mailed on Wednesday.

If announced, a decision to make banks and NBFCs responsible for digital lending entities they lend to, will effectively bring in a line of accountability, said Vivek Iyer, national leader - financial services risk advisory at Grant Thornton Bharat. What it will also do is make digital lending entities answerable to their lenders for every decision they make, which was not really the practice earlier, Iyer added.

For more on the digital lending blow-out read below:

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Also read: India’s Digital Shylocks Draw The Ire Of Regulator

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