RBI working group warns on digital lending by big tech players

 The working group has recommended the formation of a nodal agency & SRO for digital lending apps

Big tech players entering the digital lending space could have regulatory implications on concentration and competition risks, a working group of the Reserve Bank of India (RBI) has cautioned.

The RBI should work on a framework for identifying and managing risks arising from big tech as well as decentralized finance through blockchain technology, it has advised.

The report said: “… digital innovations along with the possible entry of BigTech companies may alter the institutional role played by existing financial service providers and regulated entities. A fallout of this may get reflected in blurring of regulated and unregulated financial institutions/ activities.”

Big tech firms have a big customer base and they use this to move from non-financial businesses to financial services. They do so by providing the data they have to financial entities and shift towards financial services either in a partnership or directly. The size of the entities is such that they pose significant systemic and concentration risks to the economy, the report said.

“Enhancing the traditional entity-based regulatory approach with activity-based regulations may be inadequate to ensure stability, level-playing-field/ competition, and customer protection, in the case where a non-financial conglomerate or a BigTech firm in practice provides financial services across its associates in an integrated manner,” the report added.

They have also suggested that buy now, pay later’ products should be treated as part of balance sheet lending and the RBI should encourage the creation of more digital-only NBFCs and lay the groundwork for digital-only banks. They have also said that neo-banks should be brought under the regulations of the RBI. These are suggestions that the working group has given in its report, which require wider consultation with stakeholders and further examination by the regulators and government agencies.

The working group, which was tasked with studying digital lending in the regulated financial sector as well as by unregulated players, has recommended forming a nodal agency that will verify the technological credentials of digital lending applications (DLAs) of balance sheet lenders and loan-service providers (LSPs). It will also ensure that a public register of the verified applications is maintained on its website.