Digital financial transactions need a safety net: The Tribune India
The Prime Minister recently called for a FinTech revolution with a security shield. The RBI Digital Lending Task Force has submitted its recommendations, making it an opportune time to analyze the current digital ecosystem, not only in the area of loans but also payments, and what it will take to resolve trust issues. The disruption of these areas of digital lending and digital payment was expected, given the colossal gaps in financial inclusion and lessons learned from the JAM (Jan Dhan-Aadhaar-Mobile) and UPI (Unified Payment Interface) experience. of the Indian economy. The accentuated angularities of the current ecosystem must be rounded off.
The Indian digital landscape has seen the emergence of new digital lending models due to the supply-demand matrix, accentuated in part by the distress caused by the Covid situation: (a) NBFC / digital platforms owned by banks in which the RBI has oversight (balance sheet lenders because they lend their own money); (b) Digital platforms working in partnership with NBFC / banks, acting as intermediaries, and therefore not registered with the central bank but governed by proxy by the RBI regulations applying to banks / NBFC (loans on the market, where others are allowed to lend); (c) Peer-to-peer (P2P) lending platforms, new mostly unregulated entities, equipped with digital tools, closest to the borrower in need. The RBI has mandated these retail lenders to seek regulation as P2P-NBFC. “Payday Loan” platforms and “Buy Now, Pay Later” provisions also fall into this category.
Loans without creditworthiness and without KYC make foreclosure easier. Unethical and unauthorized use of personal data to mitigate deadly and coercive methods of paying off exorbitant, unregulated interest rates makes egress impossible.
Right now, full-fledged P2P platforms connect lenders (cash-rich investors looking for attractive returns) with borrowers with poor credit scores or who do not have conventional financial reach. Going forward, India Stack will help private actors enable the disruption. India Stack is a set of APIs (Application Programming Interface), which enables government and private companies to deploy cashless and paperless technology products independent of their owners to transform India into a cashless economy.
It would even allow the street vendor who doesn’t have a bank account to digitize all of their transactions and use that information to grow their business. Through the Open Network for Digital Commerce, the government seeks to replicate the success of the Open Network for Digital
E-commerce, hoping to build a backbone where sellers and logistics service providers can connect with buyers, regardless of what platform they use through open APIs.
A large portion of digital retail payments in India is handled by the National Payment Corporation of India (NPCI), an incorporated non-profit corporation in which various national banks are shareholders. UPI, Immediate Payment Service (IMPS), Bharat Bill Pay, Aadhaar Activated Payment Service (AEPS) and RuPay are retail payment platforms operated by the NPCI.
The RBI had invited expressions of interest last year as part of a plan for new entities to create new digital payment platforms other than NPCI, called New Umbrella Entities (NUE). These were to be for-profit platforms (charging fees for transactions eg utility bill etc), presumably to reduce concentration risks and also for more options in the market. Six consortia, including Amazon, Facebook and the Tata group, applied in partnership with Reliance, ICICI etc.
But the RBI has put the plan on hold, realizing the risks of allowing the private sector to run payment platforms until data protection law is in place, learning lessons from non- Masterbank’s compliance with localization of data and data breaches to MobiKwik, etc.
The landscape is strewn with both unscrupulous actors and genuine entities. There is and always will be pressure to balance regulation with innovation. There is more and more clamor for “Soft Touch Regulation”, a euphemism for self-regulation. But self-regulation is easier said than done. The reason why unauthorized lending platforms have mushroomed is the existing asymmetry in credit information that lenders face vis-à-vis borrowers. It could have been put back a long time ago. The RBI proposed a public credit registry (credit information database), accessible to all stakeholders, and an open network for credit (infrastructure protocol for loans based on consent-based operations). ), which will favor legitimate actors and crack down on unauthorized lenders.
The current digital lending landscape is governed by the existing code of fair practice for NBFCs and banking instructions issued by the RBI from time to time, including the most recent instructions from the Master Direction NBFC-P2P (Bank reserve), 2017. The Money Lenders’ The law (Sahukar Act, as it is called in some states), in most places of jurisdiction, has been obscured and lost weight due to poor rules and statutes. regulated and supervised. States such as Telangana have strict, non-releasable covenants that have proven helpful in combating fraud related to instant loan applications. Industry associations also suggest that there should be a law prohibiting short-term loans (less than 60 days). The existing data protection law is the need for the digital lending and digital payment fields to operate smoothly and securely.
The task force suggested a nodal agency to verify all digital lending applications. He also suggested stricter standards for “buy now, pay later” loans and government notification to bring them on par with traditional credit facilities. Quite rightly, he suggests that regulated entities take responsibility for complying with the standard protocols of conduct of business of attached entities. Likewise, the emphasis on protecting the privacy of citizens’ data is a sine qua non.
Similar brainstorming is underway in the area of digital payments. There is no doubt that a well-thought-out central bank strategy with last mile connectivity by law enforcement agencies will help solve the problems we face today.