RBI Seeks To Protect Borrowers From Recovery Troubles With New Digital Lending Guidelines

India’s fintech economy is a $1.3 Tn opportunity. With such a large scale, inefficiencies and rogue elements are an increasing risk. To curb unethical practices and regulate the industry, the Reserve Bank of India (RBI) has come out with guidelines for digital lending.

The regulations will be applicable on regulated entities (REs), which include commercial banks, primary (urban) co-operative banks, state co-operative banks, district central co-operative banks and non-banking financial companies (NBFCs), including housing finance companies.

While the guidelines cover a range of issues like the definitions of matter at hand and how these platforms will use tech, one issue that stands out is related to repayment of loans issued by these REs via their digital lending partners. 

The new guidelines reduce the interference of lending service providers (LSPs) and dictate that all loan disbursals and repayments be executed between the borrowers’ bank accounts and the REs. 

The norms also prohibit any automatic increase in credit limits without the borrowers’ explicit consent. Also, the RBI has directed that any fees or charges payable to LSPs in the credit intermediation process shall be paid directly by RE and not by the borrower. 

Several reports have mentioned ‘harassment’ by digital lenders when seeking repayment of loans. These recovery agents/ institutions are known to resort to extreme means, including tracking the borrowers’ contacts, physically harassing them, and publicly shaming them.

To curb such growing incidents of unethical recovery practices employed by digital lenders, the central bank has asked the REs to put in place adequate systems and processes. These will ensure that disbursals will not be made to a third-party account, including the accounts of LSPs and their DLAs. 

Further, while signing up for a partnership with any digital lending application or a lending service provider, the due diligence onus will be on REs to ensure the former’s fairness in conduct with borrowers, especially during debt collections.

The registered entities have to comply with the digital lending guidelines by November 30. The idea is to promote innovation within the digital lending ecosystem while ensuring that there is no scope for harassment and exploitation of borrowers.