RBI deputy governor cautions fintech platform lenders on privacy concerns during loan recovery

India's digital lending infrastructure has made the loan sanctioning system online. Yet, loan recovery still needs a “feet on the street” approach, Swaminathan J, deputy governor of the Reserve Bank of India, said at a media event on Tuesday, September 2, according to news agency ANI.

According to the ANI report, the deputy governor flagged that fintech operators in the digital lending segment are giving out loans to customers with poor credit profiles and later using aggressive recovery tactics.

“While loan sanctioning and disbursement have become increasingly digital, effective collection and recovery still require a 'feet on the street' and empathetic approach. Many fintech platforms operate on a business model that involves extending small-value loans to customers often with poor credit profiles,” Swaminathan J said.

Fintech platforms' business models

The central bank deputy governor highlighted that many fintech platforms' business models involve providing small-value loans to customers with poor credit scores. This has fueled the rise of aggressive recovery strategies, which sometimes cross ethical boundaries.

Swaminathan also flagged a concerning practice of invasion of customers' privacy. According to the report, recovery agents access borrowers' personal data and contacts and use them as threats.

The deputy governor, quoted in the report, cautioned that these recovery tactics breach the individual's right to privacy and risk damaging the reputation of the regulated lenders associated with the fintech platforms.

Swaminathan focused on the RBI's regulations on outsourcing, which state that the regulated entities are accountable for every action taken by their outsourced agents, as per the report.

The digitisation step allows banks and non-banking financial companies (NBFCs) to leverage the data for more insights into their customer needs and behaviours, which can be used to make tailor-made products aside from better risk management and compliance, according to the report.

RBI's role as a regulator is to provide guidelines and frameworks that encourage innovation and manage risks effectively. The primary goal of RBI, reported the agency, quoting the deputy governor, is to ensure the stability and integrity of the system and not to affect business operations.