🚫 RBI Putting An End To Loan Scams?
Loan scams are just one of the many side-effects of the pandemic but the RBI is trying to solve this problem once and for all.
The pandemic didn't just create a health crisis, it also gave birth to a financial crisis.
Thousands of people were in urgent need of money in the last two years, due to job losses, closure of businesses or huge hospital bills.
And this need created a new kind of evil: scammy loan apps.
But whenever there is a scam with the common folks, our maseeha (saviour) the RBI rises to protect us. And it hasn't disappointed us this time as well.
🤔 Why RBI Needed To Make New Rules
Now, a lot of these people who needed money couldn't get them through banks and traditional financial institutions because of their credit histories.
This is where the digital loan apps stepped in.
These apps offered instant loans without any hassle.
But there was a catch.
They had insane interest rates. Some people had to pay an interest of Rs. 24,000 on a Rs. 30,000 loan taken for a week. The fine for delaying payments could go up to Rs. 3,000 per day.
Now, the people who had taken these loans obviously couldn't afford to pay such huge interests.Â
And the moment they defaulted, these apps would turn their lives into a living hell.
You see, they had gained access to users' phone gallery and contact information.Â
They started using their information to blackmail them. Several people lost their jobs due to this.
To put an end to this, many customers took even more instant loans, getting stuck in a vicious cycle. Others chose a more drastic route and committed suicide.
Over 20 such suicide cases have been reported in 2021 and 4 such cases have even been reported in 2022.
Now, the RBI took quick action by banning a lot of these apps.
But they were cropping up like mushrooms.
Right now there are over 1,100 loan apps in India, of which over 600 are illegal.
The RBI cannot possibly hunt and shut down all these apps, neither can it stop digital lending, which is set to grow up to $350 billion by 2023 in India alone.
So, it has decided to regulate this space.
📃 RBI's Regulations
The first thing the RBI has done is classify the kind of digital lenders to give everyone more clarity.
Types of Digital Lenders:
Entities regulated by the RBI
Entities that are allowed to carry out lending through some provisions but are not regulated by the RBI
And Entities that currently don't come under any regulation of any kindÂ
The new rules that the RBI is launching are only applicable for the regulated entities. The ones who are not technically regulated by the RBI can use these guidelines to make sure they are compliant for the time being.
And as for the third category, which is where most fraud apps currently lie, the RBI is going to introduce strict laws and rules in collaboration with the Central government.
So, why make rules for entities that are already regulated?
Because a lot of these regulated entities partner with lending service providers and digital loan applications to offer quick and easy credit facilities.
Now, these entities may be regulated but their partners sure aren't, giving them scope for conducting scams and frauds.
So, under the new rules:
Loans have to be directly transferred to the bank accounts of the borrowers and repayments need to be made into the bank account of the regulated entity. No third party should become a kabab me haddi in these transactions.Â
This will ensure that the entire loan transaction is regulated and can be audited by the RBI at any time.
The lending service providers have to tell you everything about the loan in full detail, including the loan's charges, fees and repayment methods. This is to make sure that these providers cannot make sweet promises at first to misguide customers into taking loans.
The lending service provider cannot at any time increase the credit limit without the customer's permission. Yes, we know, this shouldn't have to be said explicitly but thanks to the scammy loan apps, the RBI has to spell this out too.
The lenders have to explicitly state the all-inclusive costs of borrowing to the customers in the form of an Annual Percentage Rate (the total amount they will have to pay each year). This will put an end to irrelevant and high processing fees and transaction fees that many apps charge.
These lenders should have a proper grievance redressal system in place to handle all your complaints.
Moreover, because the RBI was particularly horrified at the misuse of personal information of users it has added a few clauses to make sure your precious data stays safe:
So, lenders can ask you only for information that is absolutely necessary, that too with your consent. The regulated entity in charge of them needs to ensure this.
Borrowers should be able to deny consent or take back any consent that they had previously offered.
The main purpose of these laws is to make sure that all loan transactions are easily trackable, so that immediate action can be taken in case of any frauds.
But because of them, a lot of fintech firms that are into lending may have to partner with banks or NBFCs.
The move will help increase users' trust in lending organisations, which will help these organisations disburse more loans.
This will be helpful for the entire economy as loans and credit directly increase people's purchasing power fuelling demand, growth, and development.
However, the RBI is not just stopping at these steps.
It also plans to spread more financial literacy around lending and loan disbursals to make people more aware of their rights and their options.
It will also set up a Self-Regulatory Organisation to set proper channels of loan recovery. This organisation will also make sure that any advertising by loan providers is not misleading.
Moreover, regulations regarding First Loss Default Guarantee (let us know if you want us to dive deep into this) may also be coming soon.
But will these actions be enough?
P.S Here's the RBI paper if you want to read it.
âš¡In a line: RBI is putting an end to loan scams by regulating the digital lending space.
💡Quick question: What other steps do you think the RBI should take?
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