India aims to copy China, but not in app lending

India Aims to Copy China, But Not in Lending-by-App Craze

India wants to emulate Beijing’s decades of infrastructure and investment-led growth. But when it comes to the consumer economy, China’s out-of-control digital debt boom is off the policy agenda. The Reserve Bank of India’s recently issued guidelines for app-based lending show a clear desire to rein in the industry after it ramped up during the pandemic.

RBI wants to strike a fine balance between the potential of digital lending to democratize credit and the potential to trap people in debt. A typical fixed cost of loan origination, servicing and collection is Rs. 5,000 for banks; It is a few hundred rupees for an online platform, according to industry sources. As mobile internet becomes ubiquitous, apps can get small-ticket credit across a large country more efficiently than traditional lenders. This helps explain the eight-fold expansion in loans disbursed by indigenous Paytms over the past year.

On the contrary, the RBI wants to end the more nefarious aspects of the industry, particularly those related to invasion of privacy. The regulator says it is halting apps’ access to “mobile phone resources such as files and media, contact lists, call logs, telephony functions” and other personal data that could be used to harm borrowers with punitive damages. Yes, lenders can ask for microphone and camera access to verify new customers, but the one-time privilege will require the lender’s express consent.

The Indian regulator must inform consumers about all-interest costs in advance and allow a look-in period in which they can change their minds. Digital apps will be funded not by borrowers but by regulated banks and nonbank finance firms acting as intermediaries.

Chinese regulators allow banks to outsource not just loan disbursement but practically all credit-risk management to unregulated software and hardware companies. As a result, they pocketed huge profits. On the contrary, the RBI has been signaling that it would be more convenient to split the interest margin roughly down the middle – between banks that provide funds and digital platforms that lend and collect payments. If the firm behind the app guarantees some of the borrower’s losses due to bad loans, central bank rules on asset securitization will apply. Basically, the RBI does not want credit risk to grow in the shadows – where it has no control.

It’s a more sensible approach overall. Nearly 1,100 lending apps have sprung up in India at the height of the chaos caused by the pandemic, promising all kinds of quick credit and buy-now-pay-later arrangements. More than half of them were operating illegally, many renting the balance sheets of local nonbank finance firms. Some of these fly-by-night operators disappeared after converting profits of at least $125 million (roughly Rs. 1,000 crore) into cryptocurrency and transferring it to foreign wallets, according to media reports. RBI’s guidelines will go some way towards clearing the field before systemic risks occur.

© 2022 Bloomberg LP


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