Jury Still Out on Digital Lending: Analysing the Evolving Regulatory Framework

Posted on November 8, 2021

Authored by Ritika Acharya*

Image Source: Banking Exchange

Digital lending platforms (“Lenders”) grew in popularity since the onset of covid because in a market where job losses and salary cuts became rampant, they provided easy access to credit. Lenders let borrowers take loans without any paperwork from the comfort of their homes, which prima facie seemed like a blessing for the cash-strapped workforce. However, testament to the adage ‘all that glitters is not gold’, some Lenders enticed borrowers into taking up loans with high interest rates. When repayment dates neared, the borrowers were bullied and humiliated if they did not repay their loans on time. Lenders were accused of using a variety of coercive tactics like ridiculing defaulters on social media, misusing their personal data by sending threats and spam messages to the borrowers’ contacts using their phone book access, breaching their privacy, charging hidden processing fees, etc.

The subsequent suicide of a few harassed borrowers was the bullet that finally shot this issue to the headlines, prompting many to ask why and how this happened. A Public Interest Litigation (“PIL”) was filed in the Delhi High Court against the outrageous interest rates charged by Lenders. In light of this, this article aims to examine how the fintech industry should be regulated to prevent the recurrence of such practices.

Narrow Scope of the Regulatory Framework

The Reserve Bank of India (“RBI”) does not directly regulate Lenders. Lenders tie up with banks and registered non-banking financial companies (“NBFCs”) to whom the The RBI's 'Fair Practice Code,' (“Code”) is applicable. RBI released a circular (“Circular”) in June 2020, requiring these entities to ensure that the Lenders they collaborate with also follow the Code. However, the Circular does not have any guideline to cap the interest rate, regulate or control Digital Lending. This is applicable for Lenders working under NBFCs only.

As a result, Lenders that are not connected with banks and NBFCs, and whose money lending sources do not come from public deposits through banks and NBFCs, are exempt from the RBI's jurisdiction. They are governed by different State-wise money lending statutes. For example, individual lending in Maharashtra is governed by the Maharashtra Money-Lending (Regulation) Act, 2014, while individual lending in Gujarat is governed by the Gujarat Money-Lenders Act, 2011.

However, State money lending laws are not being implemented properly. Lenders started charging exorbitant interest rates higher than the maximum rate specified in State legislations. The absence of a uniform statute to govern Lenders means that there is no oversight of their operations. This is why a few of them were able to get away with using exploitative tactics against vulnerable borrowers.

PIL in the Delhi High Court

A PIL was filed in the Delhi High Court (“Delhi HC”) in the case of Dharanidhar Karimojji vs UOI, in which the petitioner highlighted the fact that Lenders operate in a regulatory vacuum of sorts, because no particular authority has been established to supervise the working of online money-lending app companies.

The PIL alleged that the RBI was not controlling the exorbitant interest rate and other charges being imposed by these companies and failing to restrain them from harassing the borrowers. Even when the RBI had announced that all banks and lending institutions could allow a three-month moratorium on all term loans outstanding as of March 1, 2020, which was then extended for another three months up to August 31, 2020, a few Lenders pressed their borrowers to cough up their monthly EMIs on time. They used intimidation tactics on borrowers and threatened to file legal cases against them even during the lockdown when many businesses and jobs were impacted.

The petitioner prayed that the Delhi HC issue a writ of mandamus directing the RBI to regulate the working of Lenders doing business through a mobile application or any other platform, to stop prevent them from charging exorbitant interest on loans from borrowers, to stop the harassment of borrowers from their recovery agents, to fix a ceiling limit on the rate of interest chargeable by Lenders, and lastly, to set up a grievance redressal mechanism for borrowers in every state to resolve the problems they face from Lenders or their agents within a specific time frame.

The RBI argued that Lenders do not fall within the RBI’s purview, instead, it is the responsibility of the Central Government to regulate them. Refusing to let the RBI shirk responsibility for regulating Lenders, the Delhi HC directed the RBI to take regulatory action against Lenders. Subsequently, RBI Governor Shaktikanta Das said that the working group formed by RBI in January to study digital lending in the fintech sector, would soon release its first report on the prospects of digital lending and the risks posed by unregulated digital lending.

Regulation – The Panacea For Predatory Tactics?

In the aftermath of the Delhi HC’s directions, the digital lending industry has expressed apprehensions about being regulated by the RBI. Fintech players fear that heavy-handedness in regulating them could severely hurt the industry that has already suffered setbacks from loan defaults over the past year and a half.

Digital lending has plenty of benefits. Lending platforms enable borrowers to take loans without spending too much time on loan applications. Digital loan applications eliminate geographical barriers and the need for physical movement. The availability of loan applications on smartphones gives borrowers comfort across devices and enables quick decision-making. The digital lending industry has been a boon to many. Therefore, should the entire industry bear the brunt of a few players’ maliciousness? No. Tight regulations may not be the answer.

A decent middle ground between no regulations and tight regulations, could be self-regulation. A self-regulatory body could prevent predatory tactics from being deployed against borrowers. For example, the OJK Financial Services Authority of Indonesia (“OJK”) set up the Association of Fintech Lending Players (“AFPI”) and allowed it to self-regulate the digital lending industry.

The AFPI published a code of conduct with a focus on consumer protection. It propagated ethical practices such as limiting data collection and preventing harassment, and has also has set a daily interest rate cap of 0.8 percent for lending platforms. Its members must receive certification for compliance with the proper debt collection techniques prescribed by the AFPI. The AFPI does a background check on lending platforms before granting them registration. In addition, it reports platforms engaging in misconduct to the OJK.

India can follow a similar mechanism. A self-regulatory body that works in tandem with law enforcement agencies can be established to monitor the digital lending industry. This will help curb predatory tactics against borrowers while ensuring that the industry is not throttled by regulations. An equilibrium can be maintained between regulation and innovation.

*Ritika Acharya is a Researcher at IntellecTech Law who takes a keen interest in technology law. She is also a law student at Maharashtra National Law University (MNLU) Mumbai, with a passion for reading and writing.