Analysis of Unregulated Digital Lending and the Way Forward
[Harshitha Rathod and Suneha Kasal are law students at Jindal Global Law School and NALSAR University of Law, respectively.]
Concerns surrounding digital lending through mobile applications (apps) have been exacerbated by the pandemic. Over the past few months, several states have reported incidents of suicides amongst those who failed to repay loans taken digitally via mobile apps. The cause of these incidents includes high-handed methods adopted by digital lenders such as threats, harassment, cyberbullying, hidden processing fee, exorbitant interest rates, etc. Further, misuse of the permission granted to accesses users’ personal data such as contacts and photo gallery while installing the app have been reported. This has brought concerns surrounding digital lending under the radar of the Reserve Bank of India (RBI), which has now set up a working group to recommend a framework to regulate the digital lending industry. In this article, we examine the regulatory gaps that allowed lending apps to take up such exploitative practices in the first place. Further, we explore the way forward to prevent these incidents.
Existing regulatory vacuum - narrow scope of regulatory framework or lack of enforcement mechanism?
Digital lending apps, which act as a facilitator or interface between customers and financial institutions, have to be linked to any bank or registered non-banking finance companies (NBFC). These intermediaries must strictly adhere to the ‘Fair Practice Code’ formulated by the RBI, both in letter and spirit. On that note, it must be noted that the RBI’s Fair Practice Code only regulates those digital lending apps which are working in consonance with NBFCs or banks. Thus, apps whose money lending sources are not public deposits do not fall under the RBI’s purview; they are governed by the money lending statute of the concerned state. For example, individual lending in Karnataka is governed by the Karnataka Money-Lenders Act 1961.
Both the Fair Practice Code and the state-based money lending statutes prohibit debt recovery harassment. RBI guidelines read as follows:
“2(IV)(a) Lenders should restrain from interference in the affairs of the borrowers except for what is provided in the terms and conditions of the loan sanction documents.”
“2(IV)(c) In the matter of recovery of loans, the lenders should not resort to undue harassment viz. persistently bothering the borrowers at odd hours, use of muscle power for recovery of loans, etc.”
In addition to this, most state money lending statutes require lenders to obtain a license to operate. Further, this license is sanctioned only after receiving a security deposit from the money lenders. These state statutes prescribe security deposit depending on the money being invested into the activity of money lending and this deposit can be forfeited by the state in case of violation of provisions of the statute. This mechanism ensures that activities of the money lenders do not go unnoticed merely because they provide loans so small that they lie below the thresholds of transactions that are routinely monitored. Along with this, most state money lending statutes (for instance, Section 28 of the Karnataka Money-Lenders Act 1961) provide measures against charging an exorbitant interest rate, by notifying the ceiling and laying out the manner of calculation of interest. However, states can only enforce the provisions of these statutes against the exploitative practices of money lenders when the money lender is licensed under the statute. Therefore, the provisions of these state statutes have limited oversight.
Taking note of the rising suicide rate amongst the borrowers who used these instant loan apps, the RBI issued guidelines in June to banks and non-bank lenders providing digital loans, requiring them to furnish additional disclosures to consumers. The guidelines focused on bringing in more transparent loan processing and greater control over third-party agencies hired by lenders to recover their loans. However, since the central bank’s guidelines apply to only those apps that are connected to either a bank or NBFCs, it has no oversight on these pay-day loan apps, resulting in Google and other private platforms being responsible for hosting them. Google has a global safety policy in place for regulating these digital lending apps available on its Play Store. The policy requires that the loans provided by these apps should be for a minimum period of 60 days. However, safety policies of private platforms like google are insufficient to regulate issues like harassment during recovery, exorbitant interest rates, misuse of personal data, etc.
For these reasons, a regulatory vacuum is created where these apps go unregulated and profit off of unsuspecting borrowers. While loan sharks operated even before the digitization of money lending, these digital apps have enabled lenders to get easier and wider access to vulnerable groups of borrowers. The insufficient protection given to the user’s personal data in these apps has also enabled newer ways of debt recovery harassment. For instance, with apps allowing the lender access to the contact and photos of the borrower, forcing the borrower into repayment by calling and harassing the people in her/his contact list has become common practice.
The way forward
A petition has been filed by the chairman of the Save Them India Foundation seeking a ban on such instant digital lending apps. Recently, even the Madras High Court ordered notice to the state and the center upon a petition seeking a ban on the same matter. Further, the Telangana High Court passed an order asking the state government to take immediate steps to block illegal instant loan apps and directed the DGP to arrest those who are running such apps. Additionally, the court also directed the state to file an action report before the court.
While the pleas seeking a ban on instant loan apps are understandable, the authors argue that a complete ban would be too harsh as it will curb cash flow that the market so desperately needs post lockdown. Regulating these apps, by implementing a framework which these apps would necessarily have to comply with would be a better approach. The RBI has also recognized this and set up a working group for the same reason.
The terms of reference for the working group include evaluating digital lending activities in the regulated and unregulated financial sector and suggesting measures to expand the regulatory framework, improve the fair practice code, enhance consumer protection, and ensure robust data governance.
However, the problem is not the limited scope of the regulatory framework alone but its lack of implementation. Currently, platforms like Google's Play Store are taking active steps to remove instant loan apps which do not comply with the country’s local laws. Nevertheless, issues at the implementational level still exist since many of these apps are still available in the app store.
Therefore, Google retrospectively banning these apps is insufficient. Instead, platforms like Google should effectively undertake a pre-screening exercise and only list registered apps in the Play Store. Since these are the platforms from where customers download these digital lending apps, restraining the Play Store or other app store from allowing unlicensed or unregistered apps on its platform in the first place would go a long way in preventing such exploitative money lending practices. In other words, what the authors propose here is that only apps either working in conjunction with banks or NBFCs and thus registered with RBI or apps which are licensed under the money lending statute of the respective state should be allowed on platforms such as Google’s Play Store. In this way, the current vacuum can come to an end, as these apps would either be regulated by the framework set up by the RBI’s Fair Practice Code or any respective state’s money lending statutes. The working group set up by the RBI, alongside establishing an enhanced expansive framework, should evaluate such feasible enforcement mechanisms.
While these instant loan apps are certainly a cause of concern, it is important to note that these lending apps are the saving grace for those who are neglected by the traditional credit system of our country. These apps can enable greater access to credit and help in the robust growth of the finance sector when wielded in the right manner. It is for these reasons that regulation of these digital lending apps is imperative. By analyzing the problem caused by these apps and the policy vacuum that enabled such problems, this article identifies the lack of implementation of the existing frameworks and attempts to provide an enforcement mechanism that could help regulate the digital lending industry in an efficient manner. The RBI, the state government, and platforms like Google and Apple must work in tandem to deal with the issue of unregulated digital lending apps.