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The Reserve Bank of India (RBI) on Wednesday (August 10) released the first set of the long-awaited guidelines for digital lending based on the recommendations of a working group to mitigate the concerns surrounding the evolving lending ecosystem.

The regulatory framework is for lending entities that are regulated by the RBI and permitted to carry out lending business. 

For the entities that are authorised to carry out lending as per other statutory/regulatory provisions but not regulated by the RBI, the central bank said that the respective regulator and controlling authority can consider formulating or enacting appropriate regulations on digital lending based on the working group’s recommendations. 

On the other hand, the working group has suggested legislative intervention in lending by entities outside the purview of any statutory/regulatory provisions to curb illegitimate lending activity.

The central bank issued the guidelines in three categories. Some of the recommendations of the working group have been accepted for immediate implementation, while some recommendations have been accepted in principle but would require further examination.  Besides, the central bank also said that some of the recommendations require wider engagement with the Centre and other stakeholders due to the technical complexities, setting up of institutional mechanisms and legislative interventions.

Guidelines For Immediate Implementation

As per the RBI’s guidelines for regulated entities (REs) and lending service providers (LSPs), all loan disbursals and repayments would need to be executed between the bank accounts of borrower and the RE without any pass-through/ pool account of the LSP or other third party. Also, REs will need to pay any fees and charges payable to LSPs in the credit intermediation process.

The LSPs are engaged by the REs to extend various permissible credit facilitation services.

The central bank said that automatic increase in credit limit without explicit consent of the borrower will now be prohibited. It also called for a cooling-off or look-up period for borrowers. During this period, the borrowers can exit digital loans by paying the principal and the proportionate Annual Percentage Rate (APR) without any penalty, given it’s a part of the loan contract.

The APR will also be a part of a standardised Key Fact Statement (KFS) and the all-inclusive cost of digital loans in the form of APR will have to be disclosed to the borrowers.

“As per extant RBI guidelines, if any complaint lodged by the borrower is not resolved by the RE within the stipulated period (currently 30 days), he/she can lodge a complaint under the Reserve Bank – Integrated Ombudsman Scheme (RB-IOS),” the recommendation noted.

The REs will also have to report to Credit Information Companies (CICs) when lendings are sourced through Digital Lending Apps (DLAs). Besides, if the REs extend new digital lending products over merchant platforms which involve short-term credit or deferred payments, they will have to report to the CICs.

Besides these regulatory conduct, the RBI guidelines also focus on customer data protection. 

The DLAs will have to collect data that are only need-based, with the prior and explicit consent of the borrower. The collected data will go through clear audit trails.

“Option may be provided for borrowers to accept or deny consent for use of specific data, including option to revoke previously granted consent, besides option to delete the data collected from borrowers by the DLAs/ LSPs,” the RBI noted.

Concerns About Digital Lending

While it remains to be seen how the industry reacts to the development, the introduction of such a regulatory framework became necessary after repeated and multiple complaints by borrowers against various lending businesses. The regulations may also have an impact on lending apps and BNPL players like ZestMoney, UniCard, among others.

As the central bank said in the release, certain concerns emerged, which, if not mitigated, “may erode the confidence of members of public in the digital lending ecosystem”. 

The concerns primarily relate to unbridled engagement of third parties, mis-selling, breach of data privacy, unfair business conduct, charging of exorbitant interest rates, and unethical recovery practices. Recently, there were allegations made against loan recovery agents of an online loan app for sexually harassing a homemaker who had taken a loan from the platform.

The RBI had constituted the working group to prepare a draft report on digital lending, including lending via online platforms and mobile apps, in January 2021. The submitted report was then opened for comments from stakeholders and members of the public. The issued guidelines have taken into consideration all the inputs, the RBI said.

As per various reports, digital lending is one of the fastest-growing fintech segments in the country. The Covid-19 pandemic provided further boost to the segment. Amidst these, the central bank has been looking at tightening the regulations for fintech startups.

Earlier this year, the RBI also introduced guidelines around non-bank PPIs that restricted them from loading credits to users’ ewallets, affecting fintech startups such Jupiter, EarlySalary and KreditBee who had to halt customers’ transactions on their prepaid cards.

Pegged at $110 Bn in 2019, the digital lending market is expected to touch a value of about $350 Bn by 2023.