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Explained: How RBI plans to rein in illegal digital lending 

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The RBI panel has recommended a separate law to govern digital lending via apps. Almost half the lending apps available to Indian Android users in Jan-Feb 2021 were found to be illegal by the panel.

Explained: How RBI plans to rein in illegal digital lending 
The Reserve Bank of India (RBI) has come up with a slew of recommendations to rein in digital loan apps with the view to harnessing technology to broaden the scope of banking without hurting financial stability and ensuring customer protection.
A working group of the Reserve Bank of India (RBI) has recommended a separate legislation to govern digital lending through apps and setting up of a nodal agency and self-regulatory organisation (SRO) to prevent illegal digital lending activities.
What are RBI’s concerns?
The working group on digital lending, including lending through online platforms and mobile apps, was constituted in January this year under the chairmanship of RBI Executive Director Jayant Kumar Dash. It was set up in the backdrop of rising concerns amid a spurt in digital lending activities.
The RBI panel found that between January and February 2021, 1,100 loan apps were available for Indian Android users in 80 app stores. Of these, 600 lending apps were illegal.
There have been several complaints of harassment by digital lending apps as well. Most of these apps were found to be unauthorised and operated by offshore entities. Reports have emerged on borrowers committing suicide following harassment by lending companies, The Times of India reported. Reports also said digital lenders repatriated profits unlawfully outside the country.
Although Digital Lenders Association of India (DLAI), formed by the stakeholders of the industry, had laid down a code of conduct for self-regulation, fraudulent activities continued in the absence of clear guidelines from the RBI.
“The thrust of the report has been on enhancing customer protection and making the digital lending ecosystem safe and sound while encouraging innovation,” the RBI said in a release.
What are the recommendations?
The recommendations of the working group are based on three fronts -- legal and regulatory, technology and financial consumer protection.
Apart from recommending a separate legislation to oversee such lending, the report by the working group suggested that digital lending apps be verified by a nodal agency set up in consultation with stakeholders.
“The central government may consider bringing through a legislation styled as the ‘Banning of Unregulated Lending Activities (BULA) Act,’ which would cover all entities not regulated and authorised by RBI for undertaking lending business or entities not registered under any other law for specifically undertaking public lending business," the committee proposed.
Besides a separate law, the working group proposed setting up of an SRO, covering participants in the digital lending ecosystem.
The SRO will frame a standardised code of conduct for recovery. It will also maintain a ‘negative list’ of lending service providers.
The group also suggested that data be stored on servers located in India.
According to the working group, some baseline standards of technology and compliance must be met as a precondition for offering digital lending solutions. It said loans should be directly disbursed to the bank accounts of borrowers and serviced through bank accounts of the digital lenders.
 
“These recommendations are about putting in place a structure for the digital lending industry and maybe putting some reins in place so that while the industry is growing, you're able to look at more responsible lending,” Anurag Jain, DLAI President, told Moneycontrol.
The group has sought comments from stakeholders and members of the public on the report on the RBI website by December 31.
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