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Indian central bank tightens regulations for digital lending startups

Indian digital lending market was USD 75 billion in size in 2018.

Reserve Bank of India (RBI) has tightened the regulations for digital lending platforms, which have rapidly mushroomed in the country over the last few years, to bring in transparency in the segment and ensure that these firms stick to fair practices.

RBI, in a notification on Wednesday said online lending firms will need to disclose the names of banks and non-banking financial companies NBFCs they have partnered with to their customers. It also said, banks and NBFCs will need to mention the names of digital lending platforms engaged as agents on their websites.

“It has been observed that many digital platforms have emerged in the financial sector claiming to offer hassle-free loans to retail individuals, small traders, and other borrowers,” the RBI notification said. “Banks and NBFCs are also seen to be engaging digital platforms to provide loans to their customers.”

The regulator further added that the digital lending platforms often tend to portray themselves as lenders without disclosing the name of the bank or the NBFC, which is the actual lender. As a consequence, customers are not able to access grievance redressal avenues available under the regulatory framework.

“Of late, there are several complaints against the lending platforms which primarily relate to exorbitant interest rates, non-transparent methods to calculate interest, harsh recovery measures, unauthorized use of personal data, and bad behavior,” the notification said.

According to local media reports, many digital lenders allegedly resort to cyber-bullying to make sure borrowers pay back the money. Reports also suggested that some firms issue fake legal notices and harassment borrowers by calling their family members to recover dues.

RBI said that outsourcing of any activity by banks or NBFCs does not diminish their obligations, as the onus of compliance with regulatory instructions rests solely with them.

Startup

Read this: Digital lending on an upward trend in Southeast Asia: Report

This comes at a time when big-wigs like Google, Amazon, and others, are looking to tap India’s financial services sector, primarily in the lending space.

Local media Economic Times(ET) in a recent report said Google is likely to roll out a credit feature for small and medium enterprises (SMEs) on its payment platform Google Pay. The report said the US tech giant is partnering with top Indian lenders right now and that the service will go live by year-end.

Although, RBI is tightening the norms in this space, it hasn’t deterred investors to back companies in the digital lending market that was estimated to be of USD 75 billion in size in 2018.

On Thursday, Bengaluru-based payment and credit startup that targets millennials, said it has raised USD 5.2 million (INR 46 crore) in a pre-Series B round led by Japan-based investor Gunosy. The round also saw participation from US-based EMVC, Kunal Shah of CRED, Better Capital and existing investor Das Capital.

Founded in 2016 by Rajan Bajaj, Slice offers credit solutions exclusively for youngsters between the age of 18 and 29 years, targeting freelancers, college students, and salaried professionals. Besides providing Slice credit card, it offers no-cost EMI vouchers and emergency cash loans. It has recently expanded into expense tracking and bill conversion to EMI, among other things. As of March 2020, the company claimed, it has been offering its services at “an annual run-rate of over 400,000 new users,” and that it has become profitable within four years of operations and is among the top 10 issuers of cards in India.

With the fresh funds, Slice plans to double its management team, explore banking partnerships to launch co-branded prepaid and credit cards, and have over 500,000 users by the end of FY 2021.

Present across 18 cities in India, including Bengaluru, Mumbai, Chennai, and Delhi, the startup counts Blume Ventures, Better Capital, Traxcn Labs, China-based Finup, Russia’s Simile Ventures, USA’s EMVC and a clutch of other angels as its investors.