Beyond The Algorithm: Safeguarding Digital Lending Through Robust Compliance Measures

Within a world marked by digitisation, no industry has been left bereft of its fast-paced workings and finance is not an exception. The emergence of fintech platforms has transformed the conventional lending landscape remarkably. 

In recent years, the proliferation of digital lending, backed by convenience and accessibility, has emerged as a lucrative option for borrowers, bringing a mix of adjustments, opportunities and challenges to the market.

Despite being a robust lending solution, digital lending has become vulnerable to a series of delinquencies. From unrestricted engagement of third parties, mis-selling, breach of data privacy and unfair business conduct to unethical recovery practices, all have witnessed a steady surge, making it paramount to implement a series of digital lending guidelines.

Becoming cognizant of the need to safeguard borrowers, RBI has augmented a new set of extensive regulations and policy changes to curb malpractices associated with digital lending. In tandem, the new measures are especially designed to address the substantial increase in the aforementioned delinquencies. The RBI’s new norms will be instrumental in creating a secure digital lending space, ensuring the integrity of the overall financial ecosystem. 

Induction Of WALP

The present digital lending landscape is becoming more complex with an increasing number of customers applying for digital loans. To bring an array of digital lending platforms within its purview of regulations, RBI has mandated the establishment of a unified regulatory framework for the web-aggregation of loan products (WALP) across all regulated entities. 

The existing guidelines in the digital lending space are limited in scope and lack uniform applicability to all regulated entities. This creates an extensive need for a comprehensive approach that can ensure fair practices, customer protection, and data transparency. 

With the induction of a unified regulatory framework for WALP, RBI endeavours to aggregate loan offers from multiple lenders on a unified electronic platform. This enables the borrowers to compare and choose the best available option to avail loan from one of the available lenders.

As per the recent RBI statement, loan aggregation services offered by Lending Service Providers (LSPs) will be brought under a single roof of the regulatory framework. Subsequently, this will play a crucial role in weeding out bad characters or practices and supporting customer-centric lending services. 

The pace at which digital lending is growing, a sound regulatory framework will generate trust among consumers by allowing them to access credit safely and securely. 

Upfront Disclosure Of APR

One of the significant reasons for the rising popularity of digital lending has been its nominal interest rates. However, the sudden rise in malpractices associated with the charging of exorbitant interest rates has refrained borrowers from indulging in digital lending. 

In tandem, RBI has issued clear directions on the determination and disclosure of the interest rates that Digital Lending platforms can charge. 

The new guidelines suggest that digital lenders must disclose the all-inclusive cost of digital loans in the form of APR (Annual Percentage Rate) to the borrowers upfront. In the case of floating rate loans, RBI guidelines state the APR should be disclosed at the time of origination as per the format of KFS (Key Fact Statement) and the borrowers shall be clearly informed about the possible impact of change in benchmark interest rate on the loan leading to changes in EMI and/or tenor or both. 

Further, any increase in the EMI/ tenor or both on account of the revision in interest rate above shall be communicated to the borrower immediately through SMS, e-mail etc. At the time of reset of interest rates, NBFCs shall provide the option to the borrowers to switch over to a fixed rate as per their Board approved policy. 

The Intervention Of The DPDP Act Of 2023 

Digital lending involves handling a vast amount of critical data. Considering the abundance of sensitive information including personal and financial data, it is imperative to mitigate data breaches. 

The new Digital Personal Data Protection (DPDP) Act of 2023 mandates robust data protection and privacy measures to prevent breaches and unauthorised use of confidential information. 

As digital intervention across sectors continues to grow at a fast pace, fintech founders are having their compliance teams gear up to implement a strategy to align their data protection and privacy systems with the aforesaid Act. 

Though fintech founders and digital lenders are already required to meet the mandate to ensure the data privacy of consumers, the intervention of the DPDP Act, 2023 increases their compliance requirements. 

Furthermore, the ultimate liability to comply with the DPDP lies with the Data Fiduciary. As the fintech firms control vast data processing, they are mandated to timely assess the data for more transparency and robust security. Data Fiduciaries could be NBFCs, customer-facing fintech startups, or banks, all of whom gather customer data. 

Under the said Act, the fintech and digital lending platforms are mandated to take “reasonable security safeguards” to prevent data breaches. An instance of a single data breach can lead to up to Rs 250 crore of penalty, and also the potential blocking of services in the event of repeated violations.

Bottomline 

The RBI’s introduction of new norms to mitigate digital lending malpractices marks the beginning of a new phase of digital lending. It is rooted in ensuring a fair and transparent lending space for consumers. 

With the establishment of new regulatory framework, policies and guidelines, the RBI is continuing to actively work towards safeguarding the interests of borrowers, whilst maintaining the candour of the digital lending landscape.

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