The Reserve Bank of India (RBI) is statutorily mandated to operate the credit system of the nation to its advantage, and for that, it has mandated certain regulations. Such regulations are implemented through a Working Group on digital lending, including lending through online platforms and mobile apps.
Historically, lending has been a transaction in which the lender gives money to the borrower in exchange for a return (interest) on the money. While there are a variety of complex lending and financing instruments, lending is always centred on one thing – the ability to get the money back.
Traditionally, this sector was highly disorganized. Rapid advancements in cloud computing, artificial intelligence, and blockchain, as well as faster and more affordable internet connectivity, have fueled the rise of FinTech start-ups. Lending has also transformed and become ‘digital’.
Digital lending involves giving and recovering loans through web platforms or mobile apps. It facilitates speedy disbursal and helps lower costs. Lending Service Providers (LSPs) operate in collaboration with Non-Banking Financial Companies (NBFCs) that disburse credit to customers using the former's platform.
The RBI has encouraged innovation in the financial system, in products and credit delivery methods while ensuring their orderly growth, preserving financing stability and ensuring the protection of depositors’ and customers’ interests.
However, certain concerns have also emerged which, if not mitigated, may erode the confidence of members of the public in the digital lending ecosystem. The concerns primarily relate to the unbridled engagement of third parties, misselling, breach of data privacy, unfair business conduct, charging of exorbitant interest rates, and unethical recovery practices.
The universe of digital lenders is classified into three groups by the Reserve Bank of India (RBI) – regulated, non-regulated and outside the purview of any statutory/regulatory provisions.
The RBI has examined certain recommendations made by the WGDL for immediate implementation and the subsequent regulatory stance. Highlights of such aforesaid requirements, mandated to be followed by REs, their LSPs, Digital Lending Apps (DLAs) of Res and DLAs of LSPs engaged by REs are as follows:
Loan disbursals and repayments must be executed only between the bank accounts of the borrower and the RE without any pass-through account of the LSP or any third party. Any fees or charges are payable to LSPs in the credit intermediation process and shall be paid directly by RE and not by the borrower.
Borrowers will be required to provide a Key Fact Statement (KFS) on their credit history and the cost of digital loans in the form of an Annual Percentage Rate (APR). Borrowers may also be charged an APR under certain circumstances.
A cooling-off period during which the borrowers can exit digital loans by paying the principal and the proportionate APR without any penalty shall be provided as part of the loan contract.
REs shall ensure that they and the LSPs engaged by them shall have a suitable nodal grievance redressal officer to deal with all complaints. The details of the grievance redressal officer shall be indicated on the website of the RE, its LSPs and DLAs, as applicable.
The complainant can also lodge a complaint under the Reserve Bank - Integrated Ombudsman Scheme (RB-IOS) if the same is not resolved within 30 days by the RE.
Data collected by DLAs should be need-based, have clear audit trails, and only be carried out with prior explicit consent of the borrower.
Options may be provided for borrowers to accept or deny the consent for use of specific data, including the option to revoke previously granted consent, besides the option to delete the data collected from borrowers by the DLAs/LSPs.
Any lending sourced through DLAs (either of the RE or the LSP engaged by RE) is required to be reported to Credit Information Companies (CICs) by REs irrespective of its nature or tenor. All new digital lending products extended by REs over merchant platforms involving short-term credit or deferred payments are required to be reported to CICs by the REs.
All the regulated entities of RBI are advised to be guided by the regulatory stance conveyed in this press release. It shall be noted that any kind of outsourcing arrangement involving an RE and LSPs/DLAs shall be subject to the extant guidelines on outsourcing.
The industry has been pushed by the pandemic to embrace the tremendous potential of digital transformation. As customer demand for contactless transactions rises, more lenders will adopt technology to provide borrowers with maximum convenience. Even traditional banks and non-banking financial companies (NBFCs) are realizing the need to digitize processes such as customer onboarding, risk assessment, loan underwriting, disbursement, and repayment to reduce operational costs and enhance the customer experience.
Lenders will increasingly utilize cutting-edge technologies such as AI and big data to collect and evaluate data from multiple sources to ascertain the creditworthiness of an applicant more efficiently. With technology that enables alternative credit scoring, lenders can extend credit to a greater number of individuals, thereby advancing the cause of financial inclusion.
If you wish to read on this further, you can find the complete press release by the RBI with the recommendations accepted for immediate implementation here.
- Dimple Majithia Associate