While this reduces the build-up of systemic risk through off-balance sheet loans by unregulated players, it still leaves a gray area for unregulated entities to function as distributors. The RBI report notes that the banks lent Rs 1.1 lakh crore via digital mode, while the NBFC advanced Rs 23,000 crore via this channel. Most of them come in the form of unsecured personal loans for a few thousand rupees. But these have a short lifespan and lead to a high churn rate of the wallet.
According to a report from Macquarie, while many digital lenders will be affected, Paytm is safe because it does not enter into loan agreements where it provides a first loss default guarantee (FLDG) to actual lenders. “The report recommends that all fintech loans be reported directly to the credit bureaus. It also prohibits the sharing of credit risk between fintech and banks / NBFC in the form of FLDG agreements, ”Macquarie Capital associate director Suresh Ganapathy said in the report. He added that while Paytm is clear here as it plans to act as a pure distributor of consumer loans, several players in the FinTech industry for which this is a standard will be severely affected.
As the RBI aims to ban fintech platforms, determining which collateral is intended for credit risk can be tricky as all lenders seek some level of indemnification from service providers. “Even where there are no FLDG arrangements, the lenders have an agreement with the distributor to compensate them for any loss caused by the action of the agent or employee. This does not mean that the distributor assumes a credit risk. The challenge will be to distinguish these clauses from a default guarantee, ”said Sandeep Srinivasa, founder of microcredit startup Red Carpet.
“The proposals will demolish many existing loan sharks and reduce unfair practices. Additionally, recommending digital lenders to provide a key fact statement in a standardized format, including the annual percentage rate, will give borrowers a better perspective of the high percentage rate they are willing to bear, ”said Gaurav Chopra, Founder and 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 led by former Sebi UK chairman Sinha recommended loan service providers (LSPs). The Sinha panel had said that the regulator must create this new category of LSP, which will be a borrower’s agent. LSPs offering individualized advice must act in the best interests of borrowers, respecting the fiduciary obligations of disclosure, loyalty and prudence. Likewise, loan officers such as direct selling agents (DSAs) and brokers should be required to disclose conflicts that compromise their impartiality, such as incentives for lenders to market more expensive loans compared to others, and clearly itemize the fees they add to loans.
However, the loan service providers’ proposal was not accepted. “The RBI report suggested that the web loan product aggregator be subject to discipline and a code of conduct. Regulating aggregators would have been positive for the industry as it still leaves entities to operate outside of regulation, ”said another digital lender who did not want to be named.
Signzy Tech Co-Founder and CEO Ankit Rata said: “Currently, the industry is seeing many unregulated digital lenders operating in the space that haven’t even implemented basic KYC controls. We believe that if the recommendations are adopted, it will not only help protect consumers, but also limit data privacy breaches while limiting fraudulent transactions. ”