Digital lending space is growing rapidly. The working group on digital lending set up by the RBI has made certain recommendations and suggestions for regulation of this sector. Digital apps collaborate with banks and NBFCs to offer loans, and these apps are not regulated. There could be overleveraging of customers, excessive interest rates, dubious collection methods. Such issues have been addressed by the working group.

There should be a clear distinction between Balance Sheet Lenders (BSLs) and Loan Service Providers (LSPs). BSLs provide loans and take credit risk. They are regulated. LSPs could be digital lenders who provide borrowing options to the customers. They are not regulated. However, they have to partner with BSLs. LSPs manage the front-end. The segregation leads to innovation.

There should not be backdoor entry into regulated activities.

Many Buy Now Pay Later (BNPL) providers do not treat it as a loan. As a consequence, they do not follow KYC procedures while onboarding customers. These should be identified as lending products and there should be necessary checks.

All interest and charges paid should be Annual Percentage Rate (APR) and should be communicated to the customers. Many charges are collected as fees to make interest rates palatable. Short-term credit should be brought under appropriate guidelines to avoid excessive interest rates.

There should be fair treatment of borrowers, especially while doing collections.

Data privacy is to be maintained. Data should not be used for lending decisions without consent. CR reports should not reach unregulated entities.

There should be Self Regulatory Organisation (SRO) to govern this space. Digital Trust of India Agency (DIGITA) can be created. Agency of Financial Regulation (AFSR) can be created to regulate outsourced activities.

Big Tech in financial services must be looked into.