Online, offline credit delivery converging

The Reserve Bank of India (RBI) will tighten scrutiny of digital lending by approving apps that can be hosted on app stores. This follows newly unveiled rules restricting digital credit delivery to entities regulated by RBI or those permitted by law. The crackdown on digital usury and strong-arm loan recovery by unregulated apps is also designed to curb money laundering and will include monitoring of rented accounts, review of dormant credit companies and time-bound registration of payment aggregators. Complaints over dubious instant loans from outside India have mushroomed and investigations have widened to payment gateways. On its part, Google Play has removed over half the instant lending apps it had.

Releasing rules for online lending last month, RBI had suggested that GoI bring in legislation to ban unregulated entities. The rules for entities regulated by RBI require them to disburse loans into bank accounts of borrowers, pay the fees of lending service providers, inform borrowers of the all-in cost of loans, and provide other details for borrowers to be able to make informed decisions. It also specified how user data may be collected, involving prior and revocable consent. These rules ought to tilt online lending towards an assets-driven model and away from the current originator-distributor format. Fintechs will have to review their business models to deliver in a more transparent regime.

Banks are rapidly closing the gap with fintech firms in online distribution, and digital credit regulation will tend to converge with offline rules. Some space for innovation will have to be provided to fintech. But that will be cordoned off from the core lending business. It was only a matter of time before regulation caught up with online credit delivery.