InvestorQ : Why is the RBI insisting on regulating digital lending? Would it not kill a young industry that is just about picking up the pieces?
diksha shah made post

Why is the RBI insisting on regulating digital lending? Would it not kill a young industry that is just about picking up the pieces?

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Juvina Maggie answered.
3 months ago
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Let us first address the question of whether regulation will kill the nascent industry. The experience is that unregulated growth is more dangerous. Take the case of cooperative banks that have been largely unregulated. As a result they could never grow and attain economies of scale. In cases where trust is involved, good regulation is favorable.

RBI has been insisting that just like the lender must know the client through KYC norms, the borrower must also know about the financial strength and influence of the lender. Hence, it is essential to know the lender better. Banks and NBFCs are normally subjected to stringent regulations including licensing and minimum net worth.

In addition, the regulation also happens on an ongoing basis on parameters like capital adequacy, asset provisioning and income recognition. The biggest challenge according to the RBI is that digital lenders are growing without checks and balances. Greater disclosure and transparency, will force better corporate governance standards in such players.

As India stands on the cusp of digital and Fintech growth, the time to regulate is now. RBI has already dwelt at length on the need to regulate systemically important NBFCs and large cooperative banks in the same way as scheduled banks. That will ensure that there is no regulatory arbitrage that any player in the financial intermediation market will enjoy.

One example is the winding up of PMC Bank in Mumbai. There is a huge potential for online lending on the back of growth in mobile access, cheap smart phones and better bandwidth. Digital lending is actually simple, elegant and convenient. RBI is taking necessary steps to regulate this nascent industry before it becomes too large and implodes the bubble.

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