What is Digital Lending? Know its significance, loopholes and advantages here
Why in News?
Reserve Bank of India, RBI recently has asked individuals and small businesses not to fall prey to the growing number of unauthorised digital lending platforms and mobile applications to get quicker loans.
What is Digital Lending?
It is a practice of lending through web platforms or various mobile applications utilizing the technology for authentication and credit assessment.
Digitization of the lending process brings a number of powerful benefits for banks, including better decisions, improved customer experience, and significant cost savings.
- It helps in creating financial inclusion. It helps to meet the unmet credit need, in the microenterprise and low-income consumer segment in India.
- It helps to reduce borrowing from informal channels through informal borrowings. It also simplifies the process of borrowing.
- It is a Time-Saving process as it saves time spent uselessly in banks. Digital lending platforms have also been known to cut overhead costs by 30-50%.
Loopholes in Digital Lending
- Digital lending has given rise to a growing number of unauthorised digital lending platforms and mobile applications in the market.
- These apps usually charge excessive rates of interest and also have hidden charges.
- The applications can misuse the consumer’s data or can access data on mobile phones of the customers for selling purposes.
Steps by the Government:
- To curb the issues in digital lending various banks have collaborated with Fintechs for better customer service.
- Government of India has taken initiatives like Unified Payments Interface, Jan Dhan Yojana, Aadhaar enabled Payment System and others which create a healthier digital environment, following the demonetization.
- RBI has also mandated the disclosure of the name of the Bank or NBFC to the customers in case of digital lending platforms are being used on behalf of Banks and NBFCs
- Before the loan agreement is signed the lending apps would need to issue a sanction letter to the borrower on the letterhead of the bank/ NBFC
India is currently on the verge of digitization in lending. A code of conduct outlining the principles of integrity, transparency and consumer protection must be followed so that the process is not misused in criminal activities. Customers must be educated, trained and made aware of the pros and cons of digital lending before the usage.