GS paper 3
Syllabus: Indian Economy and Related Problems
Source: I.E
Direction: The article discusses the current digital lending ecosystem, the need to regulate it, RBI guidelines and confusion regarding it.
Context: Two months after the RBI issued digital lending guidelines, banks, non-banking financial institutions (NBFCs) and fintech players are still awaiting clarity on many aspects, including the FLDG system.
First Loss Default Guarantee (FLDG): It is a lending model between a fintech and a regulated entity where a third party guarantees to compensate up to a certain percentage of defaults in a loan portfolio to the regulated entities (RE – banks or NBFCs).
Digital lending:
- It involves giving and recovering loans through online platforms or mobile apps of digital lenders.
- Lending Service Providers (LSP) are engaged by RE to perform certain functions for RE in connection with lenders’ functions on digital platforms.
- These LSPs may be engaged in customer acquisition, insurance support, loan recovery, etc.
- According to RBI, as many as 600 out of 1,100 lending apps currently available are illegal apps and strict norms for digital lenders including separate legislation to prevent illegal digital lending activities is the need of the hour.
The guidelines for digital lending:
- RE must –
- State in advance the price charged to the borrower of a digital loan,
- Ensure borrowers are aware of the products and
- Capture the financial profile of the borrowers before offering the loans.
- On FLDG, RBI advised RE to follow the instructions on securitization, specifically, synthetic securitization.
- In the case of synthetic securitization, a bank buys credit protection on a portfolio of loans from an investor.
- This means that if a loan in the portfolio defaults, the investor reimburses the bank for losses on loans in the portfolio up to a certain amount, which is the invested amount.
- RBI asked regulated entities like banks to ensure that LSP and Digital Lending App (DLA) comply with the guidelines.
Importance of the guidelines: They were aiming for protect customers from unethical business practicessuch as mis-selling, breach of privacy, unfair business behavior and charging exorbitant interest.
Why is there so much confusion?
- Guidelines are very strict in terms of data storage, confidentiality, role and responsibility of digital partners.
- For example, REs should ensure that LSPs or DLAs engaged by them do not store the personal data of borrowers except for some basic minimal data.
Insta Links:
RBI: Digital lending rules
