Digital loans in India grow at high speed, seconds only for payments in the Indian Fintech room. However, rapid growth in use and innovation has come up with its own challenges.

After several abuse reports and high hand recovery methods used by agents of several digital loan application platforms, even encouraging customers to commit suicide, Bank of India’s reserves (RBI) forced to action.

The working group is governed by the central bank to see how digital loans can be regulated to find that 600 of 1,100 loan applications in Indian application shops that look illegal.

But Indian digital loan space continues to see rapid growth, especially after a pandemic. Between January and August 2021, loan technology companies received $ 806 million in funds, making the second largest part-18 percent-in the Fintech funding pie, according to Inc24 data.

These companies mainly provide a digital layer between traditional banking and customer entities. What is worried about regulators and this industry is an online loan in partnership with banks and non-banking financial companies (NBFCs) at this time not falling under any regulatory scope.

While the main purpose is to frame the rules that by default eliminate exploitative applications, what does this recommendation mean to be known and well funded and buy now, pay later (BNPL) Fintechs?

Causing concern?

Reports by the RBI Working Group recommends strict crackdown on digital loan applications involved in malpractices through various regulations. However, in all reports there is a clear difference made between the entities that are regulated and not regulated and what each can do.

For example, work groups suggest that loans must occur only through the books of entities set and recognized. What is not legal in the physical world cannot be considered legal just because it is happening online, he said.

In the case of online credit players who are known such as float capital, zestmoney, slices, etc., are largely included in the category of entities set because they have a NBFC license from the RBI. However, BNPL players like Simplif who do not have a NBFC license blocked if this recommendation turns into the norm.

“In loans, today’s non-calibrated growth is Tomorrow NPA (non-performing assets). After this guide enters, they will check the loan rate and the hustle and bustle capital,” said an industrial analyst.

Concerns about uncontrolled NPA growth arise when it comes to credit and innovation encourages growth too. Loan BNPL App Lazypay’s gross non-performance, for example, stands at 19 percent in FY21, according to Macquarie’s report.

“The question to be asked is, whether this BNPL player lends to subprime customers or which we call a thin file customer that we don’t have data? We need to see how this loan data is reported to the credit bureau,” analysts added.

What this registered entity must also pay more attention is a recommendation on the front of the technology. This report shows that digital loan applications must store data on servers in India, the storage policy and data usage they must be available to the public and they must document the reasons for algorithmic features behind loans.

In surprise some observers, the report also recommends that it not only lends Fintechs but also neobanks must be carried under the umbrella of this regulation.