• Recently, the Reserve Bank of India has cautioned people against unauthorised digital lending apps amid growing concerns over coercive recovery tactics and exorbitant interest rates charged by a section of digital lenders.

Crux of the issue

• The pandemic has given rise to increasing digital financial transactions as well as it has created a need for providing last mile digital connections across the country due to which the “digital lending” is making its place through various tech-led digital apps.
• Different states have different money lending regulations which allow certain operators to use the digital apps for running the schemes which is beyond the purview of Reserve Bank of India (RBI).
• Such operators may be non-authorised NBFCs and have their own kind of mobile apps which are regulated by their own and charge exorbitant interest rates which are around 30-40%.
• The major crux lies in the need of short term and working capital loans for the unserved sphere of the population who majorly goes for informal lending as formal lending does not cater the demand for short term loans or without collateral. Thus, lack of financial inclusion programmes have given rise to these unauthorised lending.

Major limitations

1. The major drawback lies in lack of creating awareness about the technology among the people as it is moving at a faster pace.
2. There is no particular regulatory body at state and district level for regulating the financial and lending activities.
3. Aligning state and central lending activities is difficult.
4. No proper legal framework at the state level for regulation of lending activities.

Way Forward

• Monitoring the lending activities is a focal point which need to be looked upon along with coordinating and synchronising the legal framework for regulating the digital lending.
• There are provisions for disseminating information at the central level by the RBI which can be implemented by state in local or vernacular language for spreading awareness among the people.
• Regulation has its own role but use of digital technology for addressing the issue of catering the short term loans demand instead of branching can be a fruitful initiative by the formal lending sector.
• State government needs to come on board for a centralised regulation framework.
• Catering the demand of short term loans by the majority of the population through formal lending is the need of the hour which can be done by ensuring a safe online transaction behaviour.
• Eg: Implement a mechanism for checking registration number of NBFCs on RBI website and move forward for getting loans.

Reference:

1. https://www.youtube.com/watch?v=Vt1lox4PHy8