Draft Circular on Digital Lending – Transparency in Aggregation of Loan Products from Multiple Lenders

garima — 2024-07-03T16:40:51Z

CIS is grateful for the opportunity to submit comments on the “Draft Circular on Digital Lending: Transparency in Aggregation of Loan Products from Multiple Lenders” to the Reserve Bank of India. We welcome the opportunity provided to comment on the guidelines, and we hope that the final guidelines will consider the interests of all the stakeholders to ensure that it protects the privacy and digital rights of all consumers, including marginalised and vulnerable users, while encouraging innovation and improved service delivery in the fintech ecosystem. Our comments look at two concerns addressed by the draft guidelines, i.e. reducing information asymmetry and market fairness. In addition to this we share comments around a third concern that requires additional scrutiny, i.e. data privacy and security.

Edited and reviewed by Amrita Sengupta

The Centre for Internet and Society (CIS) is a non-profit organisation that undertakes interdisciplinary research on the internet and digital technologies from policy and academic perspectives. Through its diverse initiatives, CIS explores, intervenes in, and advances contemporary discourse and practices around the internet, technology and society in India, and elsewhere.

CIS is grateful for the opportunity to submit comments on the “Draft Circular on Digital Lending: Transparency in Aggregation of Loan Products from Multiple Lenders” to the Reserve Bank of India. Over the last twelve years, CIS has worked extensively on research around privacy, online safety, cross border flows of data, security, and innovation. We welcome the opportunity provided to comment on the guidelines, and we hope that the final guidelines will consider the interests of all the stakeholders to ensure that it protects the privacy and digital rights of all consumers, including marginalised and vulnerable users, while encouraging innovation and improved service delivery in the fintech ecosystem.

Introduction

The draft circular on ‘Transparency in Aggregation of Loan Products from Multiple Lenders’ is a much needed and timely document that builds on the Guidelines on Digital Lending. Both documents have maintained the principles of customer centricity and transparency at their core. Reducing information asymmetry and deceptive patterns in the digital lending ecosystem is of utmost importance, given the adverse effects experienced by borrowers. Digital lending is one of the fastest-growing fintech segments in India,^{^[1]} having grown exponentially from nine billion U.S. dollars in 2012 to nearly 150 billion dollars by 2020, and is estimated to reach 515 billion USD by 2030.^{^[2]} At the same time, accessing digital credit through digital lending applications has been found to be associated with a high risk to financial and psychological health due to a host of practices that lead to overindebtedness.^{^[3]} These include post contract exploitation through hidden transaction fees, abusive debt collection practices, privacy violations and fluctuations in interest rates. Both illegal/fraudulent and licensed lending service providers have been employing aggressive marketing and debt collection tactics^{^[4]} that exacerbate the risks of all the above harms.^{^[5]} With additional safeguards in place, the guidelines can provide a suitable framework to ensure borrowers have the opportunity and information needed to make an informed decision while accessing intermediated credit, and reduce harmful financial and health related consequences.

In this submission, we seek to provide some comments on the broader issues the guidelines address. Our comments recommend additional safeguards, keeping in mind the gamut of services provided by lending service providers (LSPs). We will frame our comment around two main concerns addressed by the draft guidelines: 1) reducing information asymmetry 2) market fairness. In addition to this we will share comments around a third concern that requires additional scrutiny, i.e. 3) data privacy and security.

Reducing Information Asymmetry

The guidelines aim to define responsibilities of LSPs in maintaining transparency to ensure borrowers are aware of the identity of the regulated entity (RE) providing the loan, and make informed decisions based on consistent information to weigh their options.

Comments: Guideline iii suggests that the digital view should include information that helps the borrower to compare various loan offers. This includes “the name(s) of the regulated entity (RE) extending the loan offer, amount and tenor of loan, the Annual Percentage Rate (APR) and other key terms and conditions” alongside a link to the key facts statement (KFS). The earlier ‘Guidelines on Digital Lending’ specifies that APR should be an all-inclusive cost including margin, credit costs, operating costs, verification charges, processing fees etc. only excluding penalties, and late payment charges.

Recommendations: All users of digital lending services may not be aware that APR is inclusive of all non-contingent charges. Requiring digital loan aggregators to provide messages/notifications boosting consumer awareness of regulations and their rights can help reduce violations. We also recommend that this information is made available in various languages such that a wide range of users are able to access this information. Further we recommend that accountability be laid on the LSPs to adhere to an inclusive platform design that allows for easy access to this information.

Market Fairness

Guidelines ii-iv also serve to outline practices to curb anti-competitive placement of digital loan products through regulating use of dark patterns and increasing transparency.

Comments: Section ii mandates that LSPs must disclose the approach utilised to determine the willingness of lenders to offer a loan. Whether this estimation includes factors associated with the customer profile like age, income and occupation etc. should be clearly disclosed as well.

Recommendations: Alongside the predictive estimate of the lender’s willingness, to improve transparency loan aggregators may be asked to share an overall rate of rejection or approval as well within the digital view.

While the ‘Guidelines on Digital Lending’^{^[6]} clearly state that LSPs must charge any fees from the REs and not the borrowers, further clarification should be provided on whether LSPs can charge fees for loan aggregation services themselves, i.e. for providing information of available loan products.

Privacy and Data Security

The earlier ‘Guidelines on Digital Lending’^{^[7]} require LSPs to only store minimal contact data regarding the customer and provide consumers the ability to seek their data being removed, i.e. the right to be forgotten by the provider, once they are no longer seeking their services. Personal financial information is not to be stored by LSPs. It is the responsibility of REs to ensure that LSPs do not store extraneous customer data, and to stipulate clear policy guidelines regarding the storage and use of customer data.

Comments: It is important to ascertain the nature of anonymised and personally identifiable customer data that may be currently utilised by LSPs or processed on their platforms, in the course of providing a range of services within the digital credit ecosystem to borrowers and lenders.

Certain functions that loan aggregators perform may expand their role beyond a simple intermediary. LSPs also provide services assessing borrower’s creditworthiness, payment services, and agent-led debt collection services for lenders. Some LSPs may be involved in more than one stage of the loan process which may make them privy to additional personal information about a borrower. There may be cases in which a consumer registers on an LSP’s platform without going ahead with any loan applications. It is unclear who is responsible for maintaining data security and privacy or providing grievance redressal at these times.

Section ii allows them to provide estimates of lenders’ willingness to borrowers. Some LSPs connecting REs with borrowers may also provide services using alternative and even non-financial data to assess the creditworthiness of thin-file credit seekers. Whether there are any restrictions on the use of AI tools in these processes, and the handling of customer data should also be clarified or limited. The right to be forgotten may be difficult to enforce with the use of certain machine learning and other artificial intelligence models. As innovation in credit scoring mechanisms continues, it is also important to bring such financial service providers under the ambit of guidelines for digital lending platforms.

Recommendations: The burden of maintaining privacy and data security should fall on aggregators of loan products in addition to regulated entities as well. Include guidelines limiting the use of PII (and PFI if applicable) for purposes other than connecting borrowers to a loan provider without consumer consent. Informed and explicit consumer consent should be sought for any additional purposes like marketing, market research, product development, cross-selling, delivery of other financial and commercial services, including providing access to other loan products in the future.

Often consumers are required to register on a platform by providing contact details and other personal information. An initial digital view of loan products available could be displayed for all users without registering to help borrowers determine whether they would like to register for the LSP’s services. This can help reduce the amount of consumer contact information and other personally identifiable information (PII) that is collected by LSPs.

Emerging Risks

Emerging consumer risks within the digital lending ecosystem expose borrowers to additional risks like over-indebtedness and risks arising from fraud, data misuse, lack of transparency and inadequate redress mechanisms.^{^[8]} These draft guidelines clearly layout mechanisms to reduce risks arising from lack of transparency. Similar efforts need to be put behind reduction of data misuse by delimiting the time period and – and the risk for overindebtedness

One of the biggest sources of consumer risk has been at the debt recovery stage. Aggressive debt collection practices have had deleterious effects on consumers’ mental health, social standing and even lead some to consider suicide. Extant guidelines assume a recovery agent will be contacting the consumer.^{^[9]} LSPs may also set up automated payments and use digital communication like app notifications, messages and automated calls in the debt recovery process as well. The impact of repeated notifications and automated debt payments also needs to be considered in future iterations of guidelines addressing risk in the digital lending ecosystem.

^{^[1]} “Funding distribution of FinTech companies in India in second quarter of 2023, by segment”, Statista, accessed 30 May 2024, https://www.statista.com/statistics/1241994/india-fintech-companies-share-by-segment/

^{^[2]} Anushka Sengupta, “India’s digital lending market likely to grow $515 bn by 2030: Report”, Economic Times, 17 June 2023, https://bfsi.economictimes.indiatimes.com/news/fintech/indias-digital-lending-market-likely-to-grow-515-bn-by-2030-report/101057337

^{^[3]} “Mobile Instant Credit: Impacts, Challenges, and Lessons for Consumer Protection”, Center for Effective Global Action, September 2023, https://cega.berkeley.edu/wp-content/uploads/2023/09/FSP_Digital_Credit_Research_test.pdf

^{^[4]} Jinit Parmar, “Ruthless Recovery Agents, Aggressive Loan Outreach Put the Spotlight on Bajaj Finance”, Moneycontrol, 18 April 2023, https://www.moneycontrol.com/news/business/ruthless-recovery-agents-aggressive-loan-outreach-put-spotlight-on-bajaj-finance-10423961.html

^{^[5]} Prudhviraj Rupavath, “Suicide Deaths Mount after Unregulated Lending Apps Resort to Exploitative Recovery Practices”, Newsclick, 26 December 2020 https://www.newsclick.in/Suicide-Deaths-Mount-Unregulated-Lending-Apps-Resort-Exploitative-Recovery-Practices

Priti Gupta and Ben Morris, “India's loan scams leave victims scared for their lives”, BBC, 7 June 2022, https://www.bbc.com/news/business-61564038

^{^[6]} Section 4.1, Guidelines on Digital Lending, 2022.

^{^[7]} Section 11, Guidelines on Digital Lending, 2022.

^{^[8]} “The Evolution of the Nature and Scale of DFS Consumer Risks: A Review of Evidence”, CGAP, February 2022, https://www.cgap.org/sites/default/files/publications/slidedeck/2022_02_Slide_Deck_DFS_Consumer_Risks.pdf

^{^[9]} Section 2, Outsourcing of Financial Services - Responsibilities of regulated entities employing Recovery Agents, 2022.

For more details visit https://cis-india.org/internet-governance/blog/draft-circular-on-digital-lending-2013-transparency-in-aggregation-of-loan-products-from-multiple-lenders

User Experiences of Digital Financial Risks and Harms

2023-12-22T16:05:26Z

The reach and use of digital financial services has risen in recent years without a commensurate increase in digital literacy and access. Through this project, supported by a grant from Google(.)org, we will examine the landscape of potential risks and harms posed by digital financial services, and the disproportionate risk that information asymmetry and barriers to access pose for users, especially certain marginalised communities.

Project Background

There is a big evidence gap in the understanding of the financial risks and harms experienced by users of digital financial services. Consequently, adequate consumer protection frameworks and processes to address these harms have been lagging. A survey of 32,000 Indian consumers found only 17% who lost money through banking frauds were able to recoup their funds. Filling this gap is crucial to inform responsive policy making, platform design and data governance.

While a lot more attention is paid to financial frauds and scams, through this study, we aim to situate these alongside experiences of harms that are understudied and sometimes overlooked. Users may also experience financial harm, when negatively impacted by:

Financial misinformation
Loss of control over their assets
Loss of potential income
Difficulty accessing social protection
Financial abuse perpetrated alongside other forms of domestic and family abuse
Unsustainable levels of debt, i.e. over-indebtedness, and
Exclusion from financial services

The Centre for Internet and Society is undertaking a mixed methods study to better understand user awareness, perceptions and experiences of digital financial risks and harms.

For this study, we will survey nearly 4000 users, with differing levels of access to digital devices, digital services and the internet, and undertake semi-structured interviews and focus group discussions with specific target groups and stakeholders. We aim to highlight the experiences of persons with disabilities, gender and sexual minorities, the elderly, women, and regional language first users; to better understand how discrimination and exclusion may increase their burden of risk when using digital financial services.

Key research questions guiding our project are:

How are digital financial risks understood and experienced by users of digital financial services? Which socioeconomic factors amplify risks for different user groups?
What concerns have emerged relating to data privacy, misinformation, identity theft and other forms of social engineering and mobile app based fraud?
How accessible are providers’ and government’s platform based reporting and grievance redressal systems?
What role can fintech platforms, social media platforms, banking institutions, and regulatory bodies play in reducing digital financial risks across the ecosystem?

Project Aims

Through this study, we aim to:

Assess the financial risks and harms users are exposed to when using social media, digital banking, and fintech platforms. While looking at general users, we will also specifically explore this experience for the elderly, gender and sexual minorities, regional language users and persons with visual disabilities.
Develop a framework to categorise the nature of vulnerabilities, risks and harms faced by the concerned user groups
Create a credible evidence base for key stakeholders with regards to experiences of digital financial risks and harm.
Provide recommendations for better policy and platform design to address harms, specifically those arising from lack of accessibility and information asymmetry.
Identify best practices to respond to digital risks and foster safety and equity in digital financial services

Come Talk to Us:

If you have experiences or insights to share, or if you're interested in learning more about our study, please reach out.

We also invite researchers, financial service providers, developers and designers of fintech platforms, and civil society organisations working on digital safety, to speak to us and help inform the study. You may contact garima@cis-india.org

Research Team: Amrita Sengupta, Chiara Furtado, Garima Agrawal, Nishkala Sekhar, Puthiya Purayil Sneha, and Yesha Tshering Paul

For more details visit https://cis-india.org/raw/user-experiences-of-digital-financial-risks-and-harms