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Universal Credit Inclusion

It is no news that digital lending has taken a great leap into the life of the customers since its inception in recent years. Given the immense potential that digital lending has to offer in the market, it is quite viable that rapid growth in technology takes place.

But with the rapid growth that is happening in the sector, is putting immense pressure on the seams. It is to be noted that some of these harmful effects of the ever-growing fast growth of digital lending had expressed themselves last year through lack of compliance with customer protection norms.

This had emphatically led the RBI to constitute a working committee to effectively recommend certain guidelines that can strategically allow digital lending to grow. This was done to grow the digital lending sector in a more coherent and orderly fashion to protect the interest and welfare of the users or customers.

Thus, it can be argued that the issue of improving the digital lending sector should be viewed with the primary lens of consumer protection.

It is due to this reason, it is important that it is viewed in terms of stringent re-emphasizing of some of the existing guidelines, namely Fair Practices Code and Outsourced Service Provider Guidelines amongst others. it is well known that for the successful initiation of the process, a governing or regulatory authority is needed for chaperoning the ill aspects of the industry.

Thus, as recommended by the RBI committee, the proposal to effectively set up a self-regulating organization, that can a perfect sense provide in-depth analysis, oversight, and guidance. It is to be noted that the establishment of an industry-led SRO will emphatically help ensure that guidelines can keep pace with the rapid evolution of the industry.

Given that regulation plays a key role in making the industry abide by the regulations, thus it is important to ensure that unregulated lending activities are curbed as largely as possible to preserve consumer confidence and welfare.

This is also needed as last year it was discovered that unregulated lenders were emphatically the prime source for many of the aberrations that were observed in the market. On the top, such an issue garners extra importance due to the fact that such lending activities bypass various guidelines and supervision for responsible lending.

Responsible lending, if not regulated will heavily cost the customers who are largely unaware of the consequences. Some of the recent unregulated lendings that have cropped in the recent years go by the name as buy-now-pay-later.

Quite similarly to the unregulated BNPL sector, the need for curbing the authority of the loan sharks which function through fraudulent apps and technology-based measures is also needed. This can be highly achieved through app marketplace gatekeepers like apple and Google. This will strategically help curtail the immense spread of unscrupulous lending that at the moment is plaguing the market.

But what happens when the system is overburdened with regulation? The answer demands deeper introspection, especially in relation to additional regulations, such as National Financial Consumer Protection Regulation, Agency Financial Service Regulation, etc., it is to be noted that multiplicity of regulations can effectively hamper the growth of the nascent digital lending sector, as this can foster reluctance, inefficiency, and non-competitiveness.

This will be especially true for the recent startups in the digital lending sectors that are currently driven by younger startups. This is true as younger innovative startups increasingly have limited ability to invest in compliance overheads.

Another area of importance is the role of embedded finance. Embedded finance can play a crucial role in reducing information asymmetry that exists in the market and leads to inefficiency. It is no news that information asymmetry is a fundamental problem in extending credit in the market. This issue is systematically resolved through embedded finance as it provides strong end-user control and repayment mechanisms.

Talking about business lending, there are key building blocks of lending and are extensively used in supply chain financing. Given the nature of the business, it is to be noted that largely finances flow to the supplier accounts which are paid back through an intermediary account.

Thus it can be argued that the odious risk is often shared with an anchor corporate that has better operational risk management capability for transactions. Thus, disallowing such intermediary accounts will emphatically and increasingly restrict the ability of risk to flow where, as a matter of fact, it can be operationally managed the best.

Thus, in totality given the changing digital landscape in India and the massive growth potential that the sector has to offer, India needs to inculcate a sense of regulated transaction habits.

On the other hand, the authorities also need to keep in mind that the robust financial system does not need to be overregulated to foster inefficiency in the bussing ecosystem.

The need of the hour is to roll perfectly regulated public financial infrastructure, that facilitates transactions, encourages innovation, and protects the interests of the consumers.

Given the already existing framework, India today stands tall to offer its citizens and businesses the benefits of universal credit access.

At last, it needs to be concluded that digital lending is the need of the hour with increasing relevance every day, and with the right regulatory architecture, it has an immense potential to serve as a pertinent key driver to the growth in the country.

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Auto Debt RBI Rules for Fintech Startup Companies

In another turn of interesting events, the fintech startups could run into a problem. According to auto debit RBI new rules, Fintech companies run at the risk of attracting a 2% equalization levy. In addition to the equalization levy, the fintech startups will also attract additional goods and services tax (GST) at 18%.

This GST will be attracted on part of the money the fintech startups would make through such an arrangement. This would especially include transactions where an Indian citizen has effectively subscribed to the services of a foreign OTT player.

On the other hand, this can also levy in the case where an Indian citizen buys goods and services from a company that is effectively not based in India. Thus, one could effectively state that the Reserve Bank of India’s significant auto-debit rule could effectively and largely bring tax complications for various fintech companies that are operating in In India.

According to the reports, this will also include fintech startups that had set up platforms for banks to effectively integrate with a common e-mandate platform. This was carried out or done to ensure compliance.

This brings various Payment aggregators like Razor pay, BillDesk and PayU under the ambit of the law as these have set up platforms like MandateHQ, SiHub, and Zion, respectively. These had been operating in the capacity to form or provide a “bridge” for banks to complete the transactions.

It is no news that since the introduction of new intermediaries, they have gained popularity in recent years. These intermediaries include platforms like Netflix and Apple stores, functioning apart from the bank. With the increase in popularity, the analysis had shown that they had become an avid link between the customer and the overseas merchant establishment. Due to such arrangement, the tax implications have cropped up and have been introduced by the RBI.

Breaking down the tax structure

It is to be noted that if the tax structure is to be broken down, the equalization levy will constitute up to a 2 percent charge on any transaction which will involve a foreign company over the internet. Additionally, on further inspection, GST that will be charged will effectively depend on the structure of the fintech player’s entities.

Thus, it would depend on how the transaction is routed and the nature of such transactions. Thus, given the ambiguous nature of various forms of transactions that take place, one can state that the government’s new equalization levy could effectively come into play.

In other clarification that has been issued, fintech companies that would attract the 2% equalization levy will be on any overseas transaction or it could also be levied on the company or the merchants that are not based in India. Thus, one can state that such an equalization levy can effectively provide the risk of the platforms charging fees from the merchants.

The businesses that will come under the setup

Firstly, according to analysis, the overseas bank from which the money is being deducted which is effectively not based in India, it will attract an equalization levy of 2 percent. Similarly, these would also include banks that don’t have an emphatic tax presence in India.

The second criterion that will attract tax is the nature and structure of the transactions that will be carried out by the company. In this case, if it is found that a fee that is emphatically received by an Indian bank that doesn’t directly come to an Indian entity, will too effectively attract a 2% tax.

It is to be noted that RBI’s newer laws also include the money that goes through a subsidiary. These subsidiaries are usually of the fintech company, even these could effectively come under RBI’s scrutiny and could attract taxes.

On top of this, there is a GST implication too. GST will come into play if the money that is positively deducted from an Indian’s debit or credit card is done via the fintech’s books before it is remitted in the foreign merchants’ account.

Thus one could effectively state that the services that are provided by the fintech companies in pursuit of validating transactions could actually attract GST on both the transaction fees and the setup fee that is charged by them.

it is to be noted that RBI’s newer rules have come into effect from October 1. Since then it has been stated that banks can only process auto-debit transactions if they fulfill the criteria of sending a pre-debit notification to their customers well before time. This is to say that such notifications should be given out at least 24 hours before the payment.

it is to be noted that such a law has been brought into force as many banks do not wish to indulge in such transitions and do not have the technology for undertaking such transactions. Thus, this has led many to instead turn to fintech companies to effectively provide transaction platforms.

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RBI Proposes New Laws to Regulate Digital Lending

Once again, RBI has stepped up to protect the interests of the consumers, who in pursuit of excess money were preyed on by wealth-mongering organizations on various apps. In order to effectively safeguard the interest of the customers, the Reserve Bank working group has strongly and emphatically suggested the enactment of separate legislation. The legislation has been propped to strategically prevent illegal digital lending through apps of which innocent customers were victims.

It is no news that get-rich easy schemes are scams. With the involvement of Indian citizens in the same, leading to suicides, the RBI has come in to attack the loan sharks. It has emphatically suggested that digital lending apps should be thoroughly scrutinized and verified by a nodal agency.

This should lead to the establishment of a Self-Regulatory Organization that will effectively and positively cover the participants in the digital lending ecosystem.

Thus, one can state that RBI’s recent steps will help in enhancing customer protection and experience, protecting them from a digital or monetary felony, consequentially making the digital lending ecosystem safe. This will also promote healthy innovation in the digital lending system.

But here it is mandatory to mention that, at the moment, taking down all the apps from Appstore is only a temporary and a preventive measure to mitigate the disaster. The verification of the same should be a top priority for the apex bank.

It is to be noted that under the guidance of RBI, the working group has been set up in the backdrop of business conduct and customer protection concerns that are arising out of the spurt in digital lending activities, which really found momentum during the pandemic.

The case

But the aforementioned details, including RBI’s involvement, raise questions about the nature and motives of the customers to get involved in business with such scandalous groups on the apps? It is to be noted that the motivation for such an activity was the pandemic which has excessively curtailed the financial and monetary standing of the middle-class society in India.

With curtailed earnings, increased healthcare expenses, and inflation, easy loans were found tantalizing. This led to a full-fledged affair with the fraudulent loan apps that provided easy loans with high interest. With higher interests and lower-income, people tuned to excessive steps like suicide and self-harm.

This emphatically led the RBI to get involved in the loan app fiasco and formulation of recommendations to mitigate the disaster.

Among other things, it is to be noted that the group also suggested the development of certain baseline technology standards. These standards will have to be adhered to as a pre-condition for offering digital lending solutions.

In order to counter the blackmailing aspect of the fiasco which gave the loan app companies leverage over the consumers in turning the public into an easy target, the RBI has recommended that data collection with the prior and explicit consent of borrowers should emphatically have verifiable audit trails.

In addition to having a verifiable audit trail, the data should also be stored in servers located in India. Data privacy has long needed attention in India, given the fact that India doesn’t have standard and well-crafted rules and regulations for the same.

Further, in order to impactfully curtail the unsolicited commercial communications for digital loans, the committee has also strategically advised the same to be governed by a Code of Conduct to be put in place.

The whole loan app debacle brings to the forefront the need for transparency, better data privacy laws, and a strong vigilance mechanism by the RBI to protect the interest of the public which is currently quite susceptible to harm financially and monetarily.

With the pandemic curtailing financial freedom, it is quite a prevalent possibility that people will ultimately turn to dubious, surreptitious modes to accelerate their wealth. Thus, the need for effective governance and vigilance is the need of the hour. This can be effectively achieved through algorithmic features that are used in digital lending which will help ensure necessary transparency.

What greater attention to the loan apps fiasco is the fact that digital penetration in India is on the rise. Thus, laws to govern the same should be on the trajectory of implementation too. But given the state of data privacy and consumer protection laws, in the country, India has a long way to go. One can certainly state that the recent fraudulent disaster can help provide impetus to the process and safeguard the interest of the consumers.

It is mandatory to be mentioned here that in order to make digital lending a promising reality in India, the authorities will have to with the trust of the citizens, who are rather cynical about the process. Thus, the recent case can be a good start.

With the Reserve Bank constituting the Working Group (WG) on digital lending on to emphatically study all the aspects of digital lending activities in the regulated financial sector as well as by unregulated players in order to put an appropriate regulatory approach in place, one can positively state that future trust-building between the authorities and the citizens is on the rise.

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