For the digital lending industry 2019 has been a banner year. To start with, the term “fintech,” broadly speaking, became part of the mainstream lexicon, and several startups moved up the valuation chain to attract series A and B funding. Tens of millions of new borrowers entered the formal credit ecosystem through easily availed personal loans, consumption loans or business loans to MSMEs (micro, small and medium enterprises) .
These transformational changes in India’s credit landscape occurred under the watchful and benevolent eye of a patchwork of regulators who displayed a welcome nimbleness in responding to an evolving landscape. However, the regulators occasionally failed to go that extra yard that the digital lending industry had hoped for.
The size of the Indian digital lending market, at $75 billion in 2018, is up from $46 billion in 2016, and the sector has room for exponential growth to $1 trillion, according to a BCG survey.
In this outlook, we take a quick look at those regulatory decisions taken by the RBI (Reserve Bank of India) that helped the digital lending industry achieve as much of its potential as it did, while highlighting those rare disappointing actions that, once corrected, will further accelerate the digital transformation of India.
The RBI provided credit guarantees to public sector banks for purchase of high-rated pooled assets of financially sound NBFCs (Non-banking finance companies). In the aftermath of the credit freeze precipitated by the collapse of IL&FS, most NBFCs were neither able to access fresh credit from the banks nor issue debt securities in the capital markets. If left unattended, a bad situation would have turned out to be much worse. The RBI’s action, amounting to a maximum of Rs 1 lakh crore worth of assets during the current financial year, sent a positive signal to the industry and enabled many fintechs to continue expanding their footprint by securitising and selling assets to the banks.
Issuance of the first license and several in-principle licenses for the new category of Account Aggregator (NBFC-AA). This is globally a first-of-its kind effort to handle the transfer of personal financial data with informed consent from banks and other financial institutions to those who need it for legitimate purposes such as credit evaluation. As an example, you file a loan application with a housing finance company. The HFC asks you for your bank statements. Instead of going home, logging into your banks and downloading statements you simply give the AA permission to fetch and share them with the HFC. Once fully active this framework will be a powerful enabler of financial inclusion in India.
Introduction of framework for regulatory sandboxes in order to encourage the testing of technological innovation in finance in a controlled environment. This progressive step should allow the regulator to adopt innovative solutions in an efficient manner.
Liberalised its exposure policies for P2P (peer-to-peer) lenders by increasing the aggregate lending limits to Rs 50 lakhs from Rs 10 lakhs. It further defined the guidelines for risk evaluation and laid out a framework for outsourcing of functions by P2P platforms.
The Steering Committee at the Department of Economic Affairs has reported on the issues facing the digital finance industry.While it doesn’t qualify as policy action yet, it highlights some of the important areas in urgent need of remedies and gives us hope that policy action will indeed follow. Among the areas it highlights are offline KYC processes, digitisation of land records, usage of AI in financial decision-making, electronic execution of agreements and the risks to data privacy.
And the wishlist for 2020:
The RBI mandated that regulated entities could not share consumer credit reports from the credit bureaus with their fintech partners.
While we recognise the paramount need for protecting consumer information, this was a setback for the digital lending industry as much of the innovation on credit underwriting is happening at the unregulated fintech level. We hope that the RBI will reconsider this issue in the new year.
Aadhaar-based eKYC for non-bank lenders was one of the most powerful enablers of financial inclusion. The Supreme Court judgement on the Aadhaar Act, which restricted private entities from using it, led to changes in the PMLA (Prevention of Money Laundering Act) so that eKYC could still be used for some legitimate purposes by private regulated entities. But this requires the financial regulator to take some proactive decisions such as providing the framework under which NBFCs can apply for permission to use eKYC. While the industry has been waiting for such guidance, the RBI has had more pressing priorities to address. We hope that the RBI will provide explicit guidance on this issue early in 2020. The potential benefits are too large to ignore.
GST data on the Account Aggregator platform: The AA framework has the promise to revolutionise consent-based data sharing and unleash a wave of much-needed consumer and MSME finance. The industry had hoped that GST data would also be available seamlessly on this platform to facilitate the underwriting of SME and MSME loans. We are hoping that the ongoing discussions at the GST Council will make this a reality early in 2020 and follow that up with adding Income Tax data to the information suite.
A real-time Public Credit Registry would further eliminate credit fraud and over-leverage while enabling a smooth flow of credit to deserving borrowers. The idea has been discussed for quite some time and we hope that the year 2020 will see it come to fruition.
UPI permitting recurring transactions and standing instructions to further reduce the cost of recovering loans was an industry hope for UPI 2.0. Unfortunately that did not happen in 2019. We are hoping to see it resurrected in 2020.
Digital KYC for small businesses would provide a significant boost to both the ease of doing business and providing credit to SMEs. While individual identity has taken center stage so far in India, we hope that 2020 will see this critical area receive the appropriate amount of attention from the regulators.
The fintech sector in general and the digital lending segment in particular in India are on a high growth trajectory. Both the RBI and the market participants will have to work together so that the latter can shape their products accordingly.
Along with the regulator, the fintech players will need to look for a more collaborative working model with banks, MFIs, insurance firms and others. We all agree that it is no longer a question of doing it alone. Banks need to work with fintech players to get the desired nimbleness in its organisations, and financial innovators need to collaborate with traditional financial players for the scale they provide.
Our belief is that new systems and new business models will ultimately lead to a more inclusive financial sector, with a positive impact on the economy in the long run.
Shivashish Chatterjee is the co-founder of DMI Finance and Policy Committee Member, Digital Lenders Association of India (DLAI).