The Treasury Secretary added weight to RBI’s attack on illegal loan apps last week. Last month, RBI had issued guidelines making banks and NBFCs fully responsible for the behavior of digital intermediaries hired by them to initiate lending. GoI has now asked RBI to prepare a “whitelist” of legal apps, which will be the only ones app stores can host. The magnitude of the problem can be measured by the data collected by RBI in 2021. Over two months, January and February, RBI found 1,100 unique Indian loan apps available in more than 81 app stores, 600 of which were illegal.
But this proliferation, much of which is a threat, is filling a gap in the market – a lack of financial inclusion in lending. For deposits and transfers, digital business models have enabled rapid scaling of banking services. There are 464 million beneficiary accounts under Jan Dhan and the World Bank estimates that by 2021, 78% of Indian adults had a bank account. However, banks do not have the domain expertise to issue microloans on a large scale. This gap is being filled by the financial technology companies, which make customer convenience their USP. Credit apps work on the 2-1-0 formula: two minutes to decide, one minute to transfer and no human contact and no collateral. But of course, unregulated by RBI, these lenders often resort to tactics favored by loan sharks. In addition, there is a danger that these apps are used for money laundering and data theft.
At this point, the steps taken by the central government and RBI will have an effect. However, the only sustainable solution is to offer the convenience of loan apps in a regulated space. RBI must make trade-offs between convenience and protection for the customer. It may be instructive to look at lessons from the efforts made in 2015 to introduce differentiated banking licenses, which led to the creation of small finance and payment banks. Another set of licenses for entities that can quickly disburse microloans is an idea worth pursuing.