The Reserve Bank of India (RBI) on Wednesday issued the first set of guidelines for digital lending, to crack down on illegal activities by certain players. This follows the recommendation of a Working Group on Digital Lending (WGDL) that had submitted its report recently.
As per the new norms, all loan disbursals and repayments will be required to be executed only between the bank accounts of the borrower and the Regulated Entities (RE) - such as a bank or a non-banking financial company - without any pass-through or pool account of the Lending Service Providers (LSP) or any third party.
Stating that digital lending channels had become prominent recently, the RBI said certain concerns had also emerged which, “if not mitigated, may erode the confidence of members of the public in the digital lending ecosystem.”
The concerns 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’, it said.
The new rules mandata that fees or charges payable to LSPs in the credit intermediation process will be paid directly by the bank or NBFC and not by the borrower.
“A standardised Key Fact Statement (KFS) must be provided to the borrower before executing the loan contract,” the RBI said in a circular. “All-inclusive cost of digital loans in the form of Annual Percentage Rate (APR) is required to be disclosed to the borrowers,” it added.
The new norm prohibits any automatic increase in credit limit without the explicit consent of borrower.
It also provides, as part of the loan contract, a cooling-off/ look-up period during which the borrowers can exit digital loans by paying the principal and the proportionate annual percentage rate without any penalty.
Banks will have to ensure that they, and the LSPs engaged by them, must have a suitable nodal grievance redressal officer to deal with fintech- or digital lending-related complaints. This officer will also deal with complaints against their respective Digital Lending Apps (DLAs).
Current guidelines allow for the borrower to complain to the Integrated Ombudsman Scheme of the RBI if their grievance was not resolved by the bank within 30 days
Towards addressing concerns that had sprung up, the RBI had constituted a Working Group on ‘digital lending including lending through online platforms and mobile apps’ (WGDL) on January 13, 2021. The report submitted by the WGDL was placed on the RBI website, inviting comments of stakeholders and members of the public.
Taking into account the inputs received from a diverse set of stakeholders, a regulatory framework to support orderly growth of credit delivery through digital lending methods while mitigating the regulatory concerns, had been firmed up, it said.
This regulatory framework is based on the principle that the lending business can be carried out only by entities that are either regulated by the Reserve Bank or entities permitted to do so under any other law, it added.
The RBI has classified the universe of digital lenders into three groups – entities regulated by the RBI and permitted to carry out lending business; entities authorised to carry out lending as per other statutory/regulatory provisions but not regulated by RBI, and entities lending outside the purview of any statutory/ regulatory provisions.
While the RBI’s regulatory framework is focussed on the digital lending ecosystem of its REs and LSPs engaged by them to extend various permissible credit facilitation services, the regulator/ controlling authority of the second category may consider formulating or enacting appropriate rules/regulations on digital lending based on the recommendations of WGDL.
“For the entities in the third category the WGDL has suggested specific legislative and institutional interventions for consideration by the central government to curb the illegitimate lending activity being carried out by such entities,” the circular said.