RBI Working Group Releases Report With Recommendations On Digital Lending

The Working Group on digital lending through online platforms and mobile apps set up by the RBI in January this year has submitted its report. 

The report by the working group chaired by RBI executive director Jayant Kumar Dash has made recommendations mostly focused on enhancing customer protection and ensuring that the digital lending ecosystem remains safe and secure.

Some of the recommendations include:

• Subjecting the Digital Lending Apps to a verification process by a nodal agency to be set up in consultation with stakeholders.
• Setting up a Self-Regulatory Organisation (SRO) covering participants in the digital lending ecosystem.
• Legislation to prevent illegal digital lending activities.
• Development of certain baseline technology standards and compliance with those standards as a pre-condition for offering digital lending solutions.
• Disbursement of loans directly into the bank accounts of borrowers; disbursement and servicing of loans only through bank accounts of the digital lenders.
• Data collection with the prior and explicit consent of borrowers with verifiable audit trails.
• All data is to be stored in servers located in India.
• Algorithmic features used in digital lending to be documented to ensure necessary transparency.
• Each digital lender to provide a key fact statement in a standardised format including the Annual Percentage Rate.
• Use of unsolicited commercial communications for digital loans to be governed by a Code of Conduct to be put in place by the proposed SRO.
• Maintenance of a ‘negative list’ of Lending Service Providers by the proposed SRO.
• Standardised code of conduct for recovery to be framed by the proposed SRO in consultation with RBI.

Working Group Process 

The working group adopted a four-pronged approach towards the report. First, it began with discussions with stakeholders where formal and informal inputs were sought from academicians, regulated entities, fintech companies, fintech advocacy groups, consumer interest groups, app stores etc. 

The group received inputs from 36 such stakeholders and their feedback covered a variety of aspects including legal, regulatory, technological, code of conduct, fair practices, grievance redressal etc. 

Then, the working group conducted a representative survey where sample data was collected from 76 Scheduled Commercial Banks (SCBs) and 75 Non-Banking Financial Companies. Of these, 48 SCBs and 13 NBFCs were not engaged in digital lending. According to the data collected from the remaining, digital lending constituted 75% and 10% of the assets of SCBs and NBFCs respectively at the time of the survey. 

The survey was followed by a detailed review of the extant regulatory and supervisory framework and industry practices followed by digital lending apps (DLAs), and ancillary functions performed by outsourcing agencies and fintech companies. 

The working group also reviewed global practices and internationally published literature on the subject while taking into account global developments and approaches adopted by other countries. 

Recommendations 

In the report, the working group made short-term recommendations to subject DLAs to a verification process by a nodal agency to be set up in consultation with the stakeholders. “A nodal agency should be set up which will primarily verify the technological credentials of DLAs of the balance sheet lenders and LSPs operating in the digital lending ecosystem. It will also maintain a public register of the verified apps on its website,” said the report. 

Other short-term recommendations include restricting balance sheet lending through DLAs to entities regulated by the RBI or registered specifically for conducting a lending business and the constitution of a self-regulatory organisation (SRO) covering participants in the digital lending ecosystem. 

The report also recommended that all loan servicing, repayments and other transactions should be executed directly in the bank account of the balance sheet lender and disbursements should always be made into the bank account of the borrower. (Unless the borrower only has a PPI account, to which loans can be disbursed as long as they are fully KYC compliant). 

The working group recommended that the Union government should bring in legislation to prevent illegal lending activities by introducing a ‘Banning of Unregulated Lending Activities Act’, while also recommending that the RBI develop a separate framework for all activities of lending service providers (LSPs).

The report also makes technology recommendations including steps to protect user privacy, to prevent the transfer of data to parties outside the country, and creating baseline technology standards for all LSPs and DLAs to follow.