While this reduces systemic risk build-up through off-balance sheet lending by unregulated players, it still leaves a grey area for unregulated entities to operate as distributors. The RBI report notes that banks have lent Rs 1.1 lakh crore through digital mode, while NBFCs have advanced Rs 23,000 crore through this route. Most of these are in the form of unsecured personal loans for a couple of thousand rupees. But these have a short tenure and result in a high portfolio churn.
According to a report by Macquarie, while many digital lenders will be hit, Paytm is safe as it does not engage in lending arrangements where it provides a first loss default guarantee (FLDG) to the actual lenders. “The report recommends that all fintech loans must be reported directly to credit bureaus. It also prohibits credit risk-sharing between fintech and banks/NBFCs in the form of FLDG agreements,” said Macquarie Capital associate director Suresh Ganapathy in the report. He added that while Paytm is in the clear here as it plans to act as a pure distributor for consumer loans, several players in the fintech industry for whom this is a norm will be severely impacted.
While the RBI aims to ban fintech platforms, determining which guarantees are for credit risks might be tricky as all lenders seek a certain level of indemnity from service providers. “Even where FLDG arrangements are not there, lenders do have an agreement with the distributor to indemnify them from any loss caused by the action of the agent or the employee. This does not mean that the distributor is taking on credit risk. The challenge will be in distinguishing such clauses from a default guarantee,” said Sandeep Srinivasa, founder of microlending startup Red Carpet.
“The proposals will demolish many existing loan sharks and curb unfair practices. Moreover, the recommendation for digital lenders to provide a key fact statement in a standardised format, including the annual percentage rate, will give a better perspective to borrowers about the high percentage rate they are willing to bear,” said Gaurav Chopra, founder & CEO of IndiaLends, and founding member of the Digital Lending Association of India (DLAI).
In 2019, a high-level committee on micro, small and medium enterprises headed by former Sebi chairman U K Sinha had recommended loan service providers (LSPs). The Sinha panel had said that the regulator must create this new category of LSPs, which will be an agent of the borrowers. The LSPs offering individualised advice should act in borrowers’ best interest, respecting fiduciary duties of disclosure, loyalty, and prudence. Similarly, lender agents like direct selling agents (DSAs) and brokers should be required to disclose conflicts that compromise their impartiality, such as incentives from lenders to market higher-priced loans over others, and clearly break out the fees they add to the loans.
However, the proposal for loan service providers was not taken up. “The RBI report has suggested that web aggregator of loans products be subjected to discipline and code of conduct. Regulating aggregators would have been a positive for the industry as this still leaves entities to operate outside regulation,” said another digital lender who did not want to be named.
Signzy Tech co-founder & CEO Ankit Rata said, “Currently, the industry is seeing many unregulated digital lenders operating in the space who do not even have basic KYC checks in place. We believe that if the recommendations are passed, it will not only help protect consumers but also restrict breaches of data privacy while curbing fraudulent transactions.”
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