How Digital Debt Collection Can Help Banks & NBFCs Streamline RBI Guidelines

Money lending, borrowing, and loan recovery have always been prevalent and a part of the Indian economy. From strict yet fair debt collection practices followed during the administration of the Mauryan Empire to the present-day regulated and supervised banking system, the Indian financial sector has made considerable progress. The lending market, in particular, has made great strides in recent years. It has grown by 11% in FY 2022 and is valued at Rs 174 Lakh Cr.

In this ever-increasing market for credit and with the constant advent of fintech players, borrowers are getting easy access to loans within a short period of time. While getting approval on loans that would have otherwise been rejected by banks is beneficial to customers, the downside is the potential for fraudulent entities to dupe customers into borrowing loans with high-interest rates or hidden charges. Add to this the challenges of violation of customer data, aggressive and undignified collection methods, large turn-around times and poor grievance handling. 

Though the vulnerability of customers is seemingly high, the challenges facing the debt recovery industry cannot be overlooked, especially when there are unforeseen circumstances like the Covid pandemic that put borrowers under extreme financial strain. This leads to increased loan defaults and delinquencies, thereby affecting the functioning of debt collection agencies and creating cash flow problems. 

To promote the right digital lending practices and eliminate the possibility of unfair recovery methods for debt collection, the Reserve Bank of India (RBI) has decided to intervene and put together some norms to safeguard customers and facilitate digital lenders with more legitimacy. These regulations will make the lending process more transparent and combat the issue of customers having to deal with unethical lenders. 

Key Takeaways From RBI’s Digital Lending Guidelines

• The norms implemented by RBI will now give borrowers the option of engaging with authentic lending service providers (LSPs) and regulated entities (REs) under the statutory laws. 
• The guidelines recommend that loan disbursals and repayments be performed directly between REs and borrowers, rather than involving third parties. 
• It also directed lenders to provide customers with a “cool-off period,” wherein the latter can step out of the loan contract by paying the principal and proportionate APR without any penalty. 
• Furthermore, banks and lending institutions are required to seek consent from the customer before gathering any information to ensure data privacy and protection. 
• The RBI has also stated that REs and LSPs will have to disclose all information regarding digital lending activity to prospective borrowers collecting credit information. 
• They are also barred from publicly humiliating or calling borrowers before 8 am and after 7 pm in debt collection efforts. 
• Customers, on the other hand, can withdraw the permission given to the lenders for accessing their data anytime during the course of their contract. 

These active measures will enhance the customer experience, streamline operations, prevent defaults, sustain authentic players, and pave the way for innovations in the financial services sector.      

Will Digital Debt Collection Boost The Financial Ecosystem? 

• Personalised Interaction with Borrowers: Tech-powered applications and solutions can help lenders connect with borrowers. Customers, too, prefer to be approached via digital communication channels as per their availability. Using AI and ML capabilities, lenders can identify the availability of their customers and ease the collection department’s efforts to carry out the loan recovery process. An omnichannel communication approach can further help debt collectors engage with borrowers through emails, text messages, and voice calls.
• Optimise Loan Collection Performance: Advanced analytics and AI-backed intelligence have the potential to target and optimise loan recovery performance, boosting the debt collection process. Data analytics help lenders evaluate borrower profiles and repayment capacity. Based on this analysis, lenders can automate reminders for repayment on preferred channels, without harassing or repeatedly following up with borrowers, thereby reducing the risk of a bad customer experience.  
• Delinquency Prediction: Using AI, ML, and NLP, lenders can extract accurate, real-time data and analyse the borrower’s repayment capacity. These advanced platforms are excellent for lenders to predict potential defaulters, create an alternate recovery plan, monitor defaulting borrowers, and ease the collection process. In a way, technology lends a warning to banks and NBFCs against high-risk borrowers much in advance, preventing delinquency, reducing the potential of accounts going NPAs, and initiating proactive debt collection. 
• Improved Customer Experience and Higher Recovery Rate: AI-based debt recovery methods can transform the way collection activities are executed. Unlike earlier times that relied on a call-and-respond approach, which would often translate to a plethora of errors, bad customer experience, RBI-regulated compliance issues, and reputational consequences, digital debt collection platforms are equipped with the latest customer information; encouraging lenders to approach borrowers with more empathy, especially those at the brink of default. This saves banks and NBFCs from paying heavy fines or shutting down entirely as a consequence of non-regulatory actions or violations of customer data. Therefore, tech-enabled debt recovery platforms are a win-win for lenders and customers.

The Bottom Line

Both lending and debt collection are sensitive and challenging areas of the financial system. Thus, the exchange of funds must be carried out while guarding individual rights. 

Here’s where tech-enabled solutions powered by AI and ML can play a role in streamlining the collection process by addressing challenges specific to sending legal notices, dropping reminders for repayments, promoting compliance and tracking borrower accounts. An all-encompassing debt collection platform supports lenders in ensuring that their loan recovery practices are in congruence with the RBI guidelines.