RBI’s Digital Lending Guidelines Come Into Effect Today

The digital lending guidelines issued by the Reserve Bank of India (RBI) have come into effect on December 1, 2022. 

Released in August 2022, RBI’s digital lending guidelines sought to crack down on the predatory digital lending practices prevalent across the country. The guidelines sought to protect customers from exorbitant interest rates charged by digital lenders and prevent unethical loan recovery practices.

It also specified the regulatory, data and technology requirements of digital lenders and registered entities (REs) and no pass-through/pool account of the Lending Service Providers (LSPs). These REs constitute commercial banks, primary (urban) co-operative banks, state co-operative banks, district central co-operative banks, NBFCs and housing finance companies. 

Industry stakeholders have previously stated that while most of the fintech players complied with the guidelines (since this is a basic operational need), it has been tough on certain companies. 

“The industry is largely ready. Those who were operating on an extremely different spectrum had to change their business model, and discontinue specific products, but that would hardly comprise 5-10% of the entire industry.”  Anuj Kacker, cofounder, Freo said.

While these guidelines were issued in August 2022, they will apply to all existing customers availing new loans as well as any new customers getting onboarded.

What Has Changed With RBI’s Digital Lending Guidelines

According to the digital lending guidelines, the loan disbursal and repayment process would take place between the bank accounts of the loan borrowers and REs only. That is, third-party LSP pool accounts would not be used for loan disbursement and repayment activities.

Furthermore, REs will have to bear the cost of third-party LSPs in the loan intermediation process which was previously borne by borrowers. RBI has also asked lenders to discontinue auto-increasing borrowers’ credit limits without their consent and put in place adequate loan recovery systems and processes. 

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

Irfan Mohammed, CBO (financial services), Yubi, further shared optimism about the rise in differentiated lending models. 

“We will see a boom in co-lending agreements, and because of the quantum of loans that digital platforms will disburse, the demand for loan portfolio securitisation will also increase. Lenders will look towards digital solutions that would help them securitise their loan portfolios in the most optimised fashion,” he said.