Tuesday, December 5, 2023

RBI rap for Bajaj Finance highlights need to balance financial inclusion with consumer protection

On Wednesday the Reserve Bank of India (RBI) directed Bajaj Finance to halt digital loans through two products, eCom and Insta EMI Card, saying the company violated a few of its digital-lending rules.

The regulator said by not issuing key fact statements (KFS) to borrowers, Bajaj Finance had failed to adhere to the rules. It also found shortcomings in KFS issued for other digital loans approved by the company. The KFS provides a borrower information about interest charges, fees levied by the lender, and other key details.

The RBI made KFS mandatory in its digital-lending guidelines last year, which also called for lenders to appoint grievances-redressal officers. Bajaj Finance said it would conduct a detailed review of its KFS and take corrective action.

Regulatory action was in the offing, given the growing number of digital-loan providers (including quite a few unauthorised ones), rising defaults, and dubious recovery methods. The RBI stepping in to ensure transparency and fair lending practices is surely welcome, especially in an emerging segment of banking.

According to a recent study by the Fintech Association for Consumer Empowerment, a self-regulatory body for fintech companies, and credit information company Equifax, fintech firms disbursed loans totalling 92,267 crore in FY23. The segment is growing rapidly, and not just in big cities.

Clearly, in a country with a young population, rapid digitisation, and a growing number of fintech firms, digital lending is poised to grow rapidly.

Traditional banks have recognised this and are now offering pre-approved loans based on credit scores and other data. The personal-loan segment has benefited from increased automation, and better monitoring of saving, spending and buying behaviour. Over the next few years, more customised digital lending products are expected to be unveiled as lenders and borrowers get more comfortable with this form of lending.

More importantly, digital lenders serve a genuine need for a segment of borrowers, who have either been denied such credit or are unable to provide the collateral that other lenders demand. This has not come at the cost of big banks. Indeed, the lowering of entry barriers in banking, including differentiated licences for small finance banks, has helped expand banking services and credit across the country.

The RBI will have to be mindful of how it intervenes in the segment and avoid heavy-handed regulation. Digital payments is one thing the RBI and the government have got right so far. It is therefore important for both to boost financial literacy and set up an effective grievance-redressal mechanism. Given the pace of digitisation and the ease of reaching unbanked customers through their phones, getting this part right is crucial to increasing financial inclusion.

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