RBI throws a data-gathering key into fintech lending dreams

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The Reserve Bank of India’s actions to regulate digital lending in India have raised doubts about the business models of many such lending applications active in the space.

In the last two years, the number of applications offering loans online has risen sharply. Many of them – especially those offering payday-style loans – operate outside of the regulations and tend to collect significant personal data from a user’s phone.

The data can include media files stored on the device, contact lists, location data and even call logs. Such data has also been used by lenders to harass borrowers who fail to repay their loans. In many cases, collection agencies will also call people on a borrower’s contact list and ask them to help collect their money.

But RBI’s recently issued digital lending guidelines could very well put a stop to that by restricting the type of information fintech platforms can collect. The guidelines state that regulated entities – banks and non-bank financial firms – should ensure that fintechs do not store borrowers’ personal data beyond basic details such as name, contact details and address.

While this can help curb the threat from unregulated lenders, the restrictions can also be a killjoy for fintech lending platforms in general.

The guidelines will change things for fintechs that don’t operate their own NBFCs, according to the founder of a four-year-old fintech lending firm. Fintechs with lending ambitions start their journey by being a marketplace to match borrowers with lenders, said this person.

Once they’ve built a base of enough users and have information about their credit scores, income levels, occupations, and repayment histories, they can use that to develop an underwriting engine.

This, in turn, helps them decide which type of borrower they’d rather lend off of their own balance sheets, explained the founder quoted above.

As such, fintech lending platforms use their lending partners’ balance sheets to understand borrower profiles, select a subset to lend to, and then lend on their own when they acquire a lending license — typically through an NBFC.

This roadmap may just require a rethink.

The current policy structure would force fintechs to have their own NBFCs. Buy now, pay later Providers like Simpl work without an NBFC license and others like MoneyTap or Capital Float (now called Axio) only use them for a limited part of their loans.

The fintech founder cited above added that the capital requirements to acquire an NBFC license are also likely to make it difficult for new entrants to enter tech-enabled lending.

To apply for an NBFC license a company must be registered and have a net capital position of at least Rs 2 crore. The lack of customer data also makes it difficult for fintechs to build their own underwriting engines, the founder said.

According to former RBI Deputy Governor R. Gandhi, these guidelines have improved the compliance of regulated companies.

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