Why RBI should permit a kill-switch for phones bought on loans: It will aid credit expansion

Graded deactivation might well be a good way to ensure guaranteed servicing of loans taken to purchase electric cars and other software-dependent consumer durables in the days to come.

The mechanism of remotely turning a functional piece of equipment into an unusable liability in the event of a default in the servicing of the loan taken to purchase it is better than physical repossession in case of such a default. It would lower the cost of making such loans and benefit both borrowers and lenders.

In mid-2024, RBI acted on consumer complaints about non-banking finance companies (NBFCs) that financed the purchase of smartphones using a remote kill-switch to deactivate them on repayment defaults; NBFCs were also accused of prying into the phone-owner’s private data contained in the phone. RBI used its powers of suasion under its supervisory authority to stop lenders from taking such action—even when borrowers defaulted on their equated monthly instalment (EMI) obligations.

Many saw the behaviour of lenders as a case of corporate encroachment and suspected them of snooping on the conduct and social interactions of phone users in violation of their right to privacy as citizens. A seemingly libertarian outcry against ‘corporate greed’ being allowed to smother citizen rights may have cowed RBI into abandoning credit discipline in favour of good public relations.

Defaults on loans made to finance the purchase of smartphones started to mount. Lenders, especially smaller ones that relied on technology rather than repossession agents to take credit decisions and enforce repayment, pulled back on financing phone sales. This hurt the volume of phone sales as well.

RBI started receiving representations to bring back phone-locking as a form of digital collateral to support credit decisions. At its October monetary policy review press conference, the RBI governor indicated that the central bank was revisiting the subject, according to the Economic Times.

What is at stake goes beyond the sale of smartphones. Many of those who borrow to purchase smartphones have no formal history of availing themselves of a loan. Absent a credit history and an associated credit rating, these borrowers would in the normal course be totally ineligible to buy a phone or some other consumer good by agreeing to make a finite number of EMI payments.

Armed with the power to remotely lock the phones on which EMIs are in default, some lenders have been willing to take on the risk of deficient repayment and still give loans to such borrowers.

Buying a smartphone on credit and repaying the EMIs without any default is one sure way to acquire a credit history and a decent credit rating for millions of first-time borrowers from the world of formal finance. Disabling phone-locking in case of loan repayment default disempowers such would-be first-time borrowers as they are denied access to formal finance.

India has a relatively low level of bank credit to the private sector. Banks do not have the capacity to measure the creditworthiness of those outside the world of formal finance. NBFCs do a better job of it. Beyond these lenders, informal sources of credit meet the needs of a large segment of small borrowers. Such borrowers typically bear a higher cost of credit as compared to those who do manage to access formal finance. Clearly, it is desirable to bring larger and larger numbers into the fold of formal finance.

Loans for the purchase of smartphones can function as a viable point of entry to formal finance, provided such loans are disciplined by technical instruments such as the remote-locking of phones by phone manufacturers. Such remote-locking can easily be done through the use of a kill-switch that may be triggered when a financed phone fails to receive a message from its manufacturer saying that the payment due on the device has been received.

This functionality does not entail prying into the personal data stored on the phone or generated by the phone’s use. RBI can formulate and enforce a code of conduct for lenders, barring privacy breaches and stipulating sufficient notice to a defaulting borrower of the impending disciplinary measure. Device-locking can be calibrated, with some functionalities disabled first, before the phone is fully converted into little more than a brick.

It should be ensured that a locked phone can be unlocked, again by use of an expedient software switch, once the payment obligation is honoured and that information is relayed to the manufacturer.

Phone manufacturers have every incentive to install a kill-switch in their phones that is immune to tactics such as a reset to factory settings and to cooperate with financiers in enforcing credit discipline. That is the way to brisker sales.

When RBI dithers over resuming phone-locking as a way to create digital collateral, it discriminates against small borrowers and small lenders. It should snap out of it and act.

The author is a senior journalist.