The Reserve Bank of India (RBI) on Wednesday unveiled a regulatory framework to make digital lending safe for members of the public as the lending method gains momentum and shady practices come to the fore.
The regulatory framework focuses on the digital lending ecosystem, which includes the RBI’s regulated entities (REs) and the lending service providers (LSPs) they engage to extend various authorized credit facilitation services.
Under the frameall disbursements and repayments of the loan must be made between the bank accounts of the borrower and the RE only, with no pass-through/pool account of the LSP or any third party.
The RBI said that any fees, charges payable to the LSP in the credit intermediation process should be paid directly to the RE and not to the borrower. A Standardized Key Facts Statement (KFS) must be provided to the borrower prior to signing the loan agreement.
Borrowers must disclose the full cost of digital loans in the form of an annual percentage rate (APR). APR should also be part of KFS.
The framework prohibits automatic increases in credit limits without the express consent of the borrower. It provides for a cooling-off/look-back period during which borrowers can exit digital loans by paying the principal amount and the pro-rata annual interest rate without any penalties that should be stipulated as part of the loan agreement.
REs should ensure that the LSPs they engage have an appropriate Nodal Complaints Officer to handle complaints related to FinTech/Digital Lending. Such Complaints Officer must also deal with complaints about relevant Digital Access Loan (DLA) applications.
Joginder Rana, Vice Chairman and Managing Director, Cash, said, “RBI has laid out clear guidelines as well as the future direction for digital lending. While this will lead to a slight increase in transaction costs for some lenders, overall it will bring a lot of confidence to the ecosystem.
“This will improve standardization and the overall customer experience.”
He noted that the cost of operations will increase slightly for some digital lenders in terms of minor adjustments they will need to make to mobile apps, make some disclosures, etc.
The growth of payments is 12 times
According to RBI’s Working Group on Digital Lending, total digital disbursements across the sample (public sector banks, private sector banks, foreign banks and NBFCs) increased more than twelvefold between 2017 and 2020 ( from ₹ 11,671 crore to ₹ 141,821 crore).
The main products that banks offer digitally are personal loans, followed by SME loans. Several private sector banks and foreign banks also offer Buy Now Pay Later (BNPL) loans.
Most of the loans issued by NBFCs digitally are personal loans, followed by other loans (which primarily include consumer loans).
RBI’s framework seeks to address issues primarily related to rampant third-party involvement, fake selling, data privacy breach, dishonest business practices, charging of exorbitant interest rates and unethical refund practices.
According to the framework, the data DLA collects must be needs-based, must have clear audit trails and must only be collected with the prior express consent of the borrower.
Borrowers may be given the ability to accept or decline consent to the use of certain data, including the ability to withdraw previously given consent and the ability to delete data collected from DLA/LSP borrowers.
Any loans received through DLA (either from an RE or from an LSP engaged by the RE) must be reported by REs to the Credit Information Company (CIC), regardless of their nature or duration.
In addition, all new digital lending products extended by REs through trading platforms that include short-term credit or deferred payments must be reported by REs to the CIC.
Gaurav Chopra, founder and CEO of IndiaLends, said, “Most new customers today are borrowing for the first time, and an increasing share is coming through digital channels. This is where we believe the framework ensures that responsible players are rewarded for working in the best interest of the consumer.
“This will only increase consumer confidence and trust in the credit system.”
August 10, 2022