What Do RBI’s Guidelines Mean For India’s Lending Sector?

Going digital is no longer an option for businesses in today’s world. Digitalisation is the default setting for new-age businesses, which helps them reach the masses and scale within a few years. With the hands-on latest technologies and the world’s digital transformation, digital lenders are reaching out to the audience and making it simple for them to obtain unsecured loans in a matter of minutes.  

However, the frequent complaints of customer harassment against digital lenders have prompted the Reserve Bank of India to put an end to lending malpractices. The last few months were crucial as many new guidelines and rules have been introduced. 

As of now, digital lenders are frequently subjected to stringent regulations because they find themselves in a unique situation in which using fair means to lend and retrieve money is the only way to stay in business.  

Unrestricted engagement of third parties and mis-selling are two of the most serious concerns with providing loans online. This raises concerns because it is critical to know whether the digital lender is lending money to its users from secure digital sources. 

The unsecured loan apps not only target pandemic-affected people with exorbitant interest rates, hidden fees, bizarre processing charges, and predatory recovery practices. They also use risky third-party digital processes while lending, which can result in money theft, sensitive data theft, fraud, and breaches. 

To avoid fraud, the RBI advises using the services of established and RBI-registered NBFC digital lenders and staying away from dubious apps and websites. Furthermore, the RBI and the Indian government collaborated and removed hundreds of unsafe personal loan apps from the Play Store (India). 

How Can New RBI Regulations Make The Right Difference?  

The RBI’s new guidelines are aimed not only at ending customer harassment but also at establishing a regulatory framework for previously unregulated fintech companies venturing into the space of digital lending. The guidelines will force digital lenders to increase their operational intensity for lenders in the near term and encourage them to become regular entities. 

Overall, this is a positive move by the RBI that will eventually help the market become stronger and more sustainable. Fintechs in digital lending will feel compelled to either become regulated entities or become loan service providers with complete transparency. It will ensure that digital lenders run their business openly and are not out to defraud borrowers of any size. Serious digital lenders/fintechs who have built real lending models will benefit from it because it adds value to the entire ecosystem. 

Furthermore, there are allegations that digital lenders do not provide complete information about borrowing costs and the consequences of late or missed loan payments. Such fintech firms infiltrate the borrowers’ smartphones by installing malware and accessing the contact list. According to the RBI’s new rules, regulated entities must disclose all costs upfront in a digital loan product to the customer and are not permitted to sift through borrowers’ smartphone data.  

The RBI believes that underwriting should be based on the borrower’s ability and intention, rather than on illegal data collection mechanisms or instilling fear in the borrowers. Once again, the right digital lenders want to have transparency to increase trust among the users and eventually grow in the financial sector. So, if digital lenders have a legitimate reason for charging fees, why shouldn’t they be open about it? 

Regulations Must Centre Innovation 

With all of the new regulations and laws on the table for lenders and fintechs to sign, they want the RBI to keep innovations in mind while promoting regulations. Digital lenders ask for fair trade because innovation is the key to winning the market, even in finance.  

At the recently concluded Global Fintech Fest 2022, RBI Governor Shaktikanta Das assured the fintech community that the RBI would continue to encourage and support innovation. At the same time, he stated that they expect the ecosystem to focus on governance, business conduct, regulatory compliance, and risk mitigation frameworks.  

The statement from the RBI governor comes as a great assurance. The fintech road is long, but more innovative players are bound to enter, encouraging them to bring in innovation and novelty while offering services such as digital lending.  

New Regulations Will Bring Security & Faith 

Only essential data from the borrower will be allowed to be collected under one of the new digital lending rules, but only with their prior consent. It establishes a sense of security between the borrower and the lender.  

The new guidelines also state that the lending process’s fees must be split between the LSP and the lender. These charges can’t be demanded from the borrowers. It will protect borrowers from hidden and unnecessary charges.  

The new rules will make the entire process transparent, reliable, and trustworthy for borrowers.  Furthermore, it will foster healthy competition among digital lenders, resulting in innovation to expand the digital lending business.

Note: We at Inc42 take our ethics very seriously. More information about it can be found here.