After a spate of suicides and a series of arrests by the police in at least four states, the banking regulator took cognizance of the issue by setting up a working group on digital lending, including lending through mobile platforms and apps. The committee will submit its report within three months.

“Recent spurt and popularity of online lending platforms and mobile lending apps (‘digital lending’) has raised certain serious concerns which have wider systemic implications. Against this backdrop, a Working Group (WG) is being set up to study all aspects of digital lending activities in the regulated financial sector as well as by unregulated players so that an appropriate regulatory approach can be put in place,” the central bank said in a statement on Wednesday.

The online Indian lending apps mainly on Google Play Store took advantage of the Covid-19 situation when scores of people lost their jobs. They started dispensing small loans with high interest rates, processing fees and abusive recovery methods which forced several borrowers to commit suicide.

RBI regulations on recovery methods does not include financial intermediaries like the loan lending apps which have sprung up taking advantage of the policy loopholes.

Set up against this background, the working group, chaired by RBI executive director Jayant Kumar Dash, will consist of both internal and external members.

The other internal members are Ajay Kumar Choudhary (CGM-in-Charge, Department of Supervision), P Vasudevan (CGM, Department of Payment and Settlement Systems) and Manoranjan Mishra (CGM, Department of Regulation). The external members are Vikram Mehta (co-founder of Monexo Fintech) and Rahul Sasi (cyber security expert and founder of CloudSEK).

RBI said that digital lending has the potential to make access to financial products and services more fair, efficient and inclusive. From a peripheral supporting role a few years ago, FinTech-led innovation is now at the core of the design, pricing and delivery of financial products and services.

"While penetration of digital methods in the financial sector is a welcome development, the benefits and certain downside risks are often interwoven in such endeavours," RBI added.

A balanced approach needs to be followed so that the regulatory framework supports innovation while ensuring data security, privacy confidentiality and consumer protection, the central bank said while setting up the panel.

A balanced approach needs to be followed so that the regulatory framework supports innovation while ensuring data security, privacy confidentiality and consumer protection, the central bank said while setting up the panel.

The panel has also been asked to suggest regulatory changes, if any, to promote orderly growth of digital lending. It has to recommend measures for expansion of specific regulatory or statutory perimeter and suggest the role of various regulatory and government agencies.

The panel would also be recommending a robust fair practices code for digital lending players and suggesting measures for enhanced consumer protection.

Last month, the Reserve Bank had cautioned the public not to fall prey to the growing number of unauthorised digital lending platforms and mobile apps.

"There have been reports about individuals/small businesses falling prey to growing number of unauthorised digital lending platforms/mobile apps on promises of getting loans in quick and hassle-free manner," it had said.

These reports, it said, also refer to excessive rates of interest and additional hidden charges being demanded from borrowers; adoption of unacceptable and high-handed recovery methods; and misuse of agreements to access data on the mobile phones of the borrowers.