RBI Releases Much-Awaited Guidelines For Digital Lending

RBI Releases Much-Awaited Guidelines For Digital Lending

SUMMARY

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

The RBI has not only prescribed business conduct requirements but also stressed on data protection of borrowers

Automatic increase in credit limit without explicit consent of the borrower will now be prohibited, as per the guidelines

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.

Note: We at Inc42 take our ethics very seriously. More information about it can be found here.

You have reached your limit of free stories
Become An Inc42 Plus Member

Become a Startup Insider in 2024 with Inc42 Plus. Join our exclusive community of 10,000+ founders, investors & operators and stay ahead in India’s startup & business economy.

2 YEAR PLAN
₹19999
₹7999
₹333/Month
Unlock 60% OFF
Cancel Anytime
1 YEAR PLAN
₹9999
₹4999
₹416/Month
Unlock 50% OFF
Cancel Anytime
Already A Member?
Discover Startups & Business Models

Unleash your potential by exploring unlimited articles, trackers, and playbooks. Identify the hottest startup deals, supercharge your innovation projects, and stay updated with expert curation.

RBI Releases Much-Awaited Guidelines For Digital Lending-Inc42 Media
How-To’s on Starting & Scaling Up

Empower yourself with comprehensive playbooks, expert analysis, and invaluable insights. Learn to validate ideas, acquire customers, secure funding, and navigate the journey to startup success.

RBI Releases Much-Awaited Guidelines For Digital Lending-Inc42 Media
Identify Trends & New Markets

Access 75+ in-depth reports on frontier industries. Gain exclusive market intelligence, understand market landscapes, and decode emerging trends to make informed decisions.

RBI Releases Much-Awaited Guidelines For Digital Lending-Inc42 Media
Track & Decode the Investment Landscape

Stay ahead with startup and funding trackers. Analyse investment strategies, profile successful investors, and keep track of upcoming funds, accelerators, and more.

RBI Releases Much-Awaited Guidelines For Digital Lending-Inc42 Media
RBI Releases Much-Awaited Guidelines For Digital Lending-Inc42 Media
You’re in Good company