Digital Lending Norms Are To Protect Loan Borrowers: RBI Deputy Governor

The newly introduced digital lending norms by the Reserve Bank of India (RBI) have been framed to protect loan borrowers and also, culminate regulatory arbitrage, said Rajeshwar Rao, RBI deputy governor. 

Attending an event held by ASSOCHAM, Rao said that the RBI has regulated digital lending activities for several reasons. These include unrestricted engagement of third-party loan providers, mis-selling of digital loans, data infringement, illicit business practices, improper recovery practices and inflated interest rates. 

 “The framework is designed to strike a balance between the need for innovative and inclusive systems, while ensuring regulatory arbitrage is not exploited to the detriment of customer’s interests,” he added.

The comments have been made against the backdrop of RBI’s new guidelines to regulate digital lending in India. As per the central bank’s new guidelines, the process of loan disbursal and repayment would take place between the bank accounts of the loan borrowers and regulated entities (lending entities that are regulated by the RBI). 

Herein, third-party loan service providers’ (LSPs) pool account would not be used for loan disbursement and repayment activities.

Add to that, regulated lending entities will have to bear the cost of third-party lending service providers in the loan intermediation process. Earlier, loan borrowers used to pay these expenses to third-party lending service providers.

The RBI further informed that the automatic increase in borrowers’ credit limit will be ceased by the lending service providers unless the borrowers give consent to do so. 

In the previous week, the central bank asked regulated entities and lending service providers to conform to the new lending guidelines by November 30th.

Speaking on risks associated with digital lending, Rao said, “As we appreciate the benefits of digital credit, one needs to take cognisance of the risks involved. These include issues like data privacy breach, disruptive business models, aggressive recovery methods and exorbitant interest rates.” 

According to an Inc42 analysis, India’s fintech market is likely to become a $1.3 Tn by 2025, growing at a CAGR of 31%. Of this, lendingtech is a subsector that will capture 47% of the fintech market and become a $616 Bn market by 2025. 

It is prudent to note that the anti-money laundering body Enforcement Directorate earlier probed 365 fintech loan apps that earned proceeds over INR 800 Cr. 

Besides, the ED recently investigated the premises of Paytm, Cashfree and Razorpay in connection with the Chinese loan apps. The regulatory body also seized INR 17 Cr, which belonged to the loan apps.