With the mantra of “financial inclusion”, credit reach to the vast Indian population has been an economic concern and financial institutions have viewed this untapped market as a potential growth opportunity.
As last mile outreach is a challenge, better internet connectivity and access to financing at the fingertips of a smartphone plays a huge role. NBFCs have been at the forefront of this revolution and are either “digital” or have tied up with various digital platforms in order to connect with potential market participants.
This has also garnered interest on account of COVID -19 pandemic.
On June 24, 2020, the Reserve Bank of India (“RBI”) issued a notification dealing with loans sourced by banks and NBFCs over digital platforms. RBI has considered the existing practice of an outsourcing arrangement and mandated that to the role that is played by the digital platform and the NBFCs.
The notification reiterates the principles of privity between the NBFC and the borrower within the existing regulatory framework and the need for “best practices” in the digital lending world.
The crucial change on account of digital lending is the ease in the operational processes. Gone are the days of lengthy loan agreements, executing each page, multiple visits to lenders, etc. Loan at fingertips started with catering to borrowers looking for small loans, but once the processes are set up, the quantum will be immaterial. It is widely believed that digital lending platforms have the potential to change the landscape of retail lending in the days to come.
While there are platforms which provide the “matchmaking” facility for a NBFC and a Borrower, RBI as it regulates the NBFCs as a lender, has reiterated that the guidelines on outsourcing of financial services, continues to apply for digital lending. The NBFC continues to be ultimately responsible for the activities which are outsourced by it.
The development in the digital lending space is rapid and many new players are being innovative and making a mark in this sector. While focusing on technological advancement for better customer convenience and experience, ensuring compliance with regulations and laws at the onset would be critical to ensure sustainable growth.
Contributed by: Veena Sivaramakrishnan, Partner; Utkarsh Bandhu, Principal Associate
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