Digital lending. Amount under default to be the ceiling on which penal charges can be levied: RBI on digital loans

The Reserve Bank of India(RBI) said the amount under default for digital loans shall act as the ceiling on which the penal charges can be levied. The central bank made the clarification in its frequently asked questions (FAQs) on Digital Lending Guidelines.

According to the RBI, the borrowers may be conveyed at the time of sanction of a digital loan, the name of empanelled agents authorised to contact them in case of loan default.However, if the loan turns delinquent and the recovery agent has been assigned to the borrower, the particulars of such recovery agent assigned must be communicated to the borrower through email/SMS before the recovery agent contacts the borrower for recovery.

Further, penal charges such as cheque bounce/mandate failure charges, which are necessarily levied on a per instance basis may not be annualised. However, these charges must be disclosed separately in the Key Fact Statement (KFS) under ‘Details about Contingent Charges’.

The RBI said reasonable one-time processing fee can be retained if the customer exits the loan during cooling-off period. This, if applicable, should be disclosed to the customer upfront in KFS. However, the processing fee has to be mandatorily included for the computation of Annual Percentage Rate (APR).

The central bank clarified that even if some physical interface with a customer is present in the lifecycle of a digital loan, the lending will still fall under the definition of digital lending.

The RBI emphasised that the phrase ‘largely by use of seamless digital technologies’ has been used in the digital lending definition to accord operational flexibility to REs in ‘digital lending’.

Therefore, even if some physical interface (relating to customer acquisition, credit assessment, loan approval, disbursement, recovery, and associated customer service) with the customer within the (digital) loan lifecycle is present, the lending will still fall under the definition of digital lending. However, while doing so, the regulated entities (REs) should ensure that the intent behind the guidelines is adhered to.

The RBI said only if a lending transaction qualifies under the definition of ‘Digital Lending’, will the service provider (to whom RE has outsourced some of its credit intermediation activities) facilitating such lending be designated as Lending Service Provider (LSP). LSP is an agent of a RE who carries out one or more of the lender’s functions or part thereof in customer acquisition, underwriting support, pricing support, servicing, monitoring, recovery of specific loan or loan portfolio on behalf of REs in conformity with extant outsourcing guidelines issued by the RBI.

The central bank said only those LSPs which have an interface with the borrowers would need to appoint a nodal Grievance Redressal Officer. It reiterated that the RE shall remain responsible for ensuring resolution of complaints arising out of actions of all LSPs engaged by them.

The RBI noted that EMI programmes on credit card are governed specifically by Master Direction on Credit Card and Debit Card – Issuance and Conduct, 2022. Such transactions shall not be covered under the guidelines on digital lending. However, other loan products offered on credit cards which are not covered/envisaged under the aforesaid Master Direction shall be governed by the stipulations laid down under the guidelines on digital lending.

Further, the guidelines will also be applicable to all loans offered on debit card, including EMI programmes.

Floating rate loans

In case of floating rate loans, APR may be disclosed at the time of origination based on the prevailing rate as per the format of Key Fact Statement (KFS). However, as and when the floating rate changes, only the revised APR may be disclosed to the customer via SMS/ e-mail each time the revised APR becomes applicable.

RBI said insurance charges shall be included in the computation of APR only for the insurance which is linked/integrated in loan products as these charges are intrinsic to the nature of such digital loans.

Delinquent loans

In case of delinquent loans, the RBI said REs can deploy physical interface to recover loans in cash, where absolutely necessary.

In order to afford operational flexibility to REs, such transactions are exempted from the requirement of direct repayment of loan in the RE’s bank account.

However, any recovery by cash should be duly reflected in the borrower’s account. Further, REs shall ensure that any fees, charges, etc., payable to LSPs are paid directly by them (REs) and are not charged by LSP to the borrower directly or indirectly from the recovery proceeds.

Referring to exemption granted from direct disbursal to the bank account of the borrower to the extent of flow of money between REs in the case of co-lending transactions, the RBI said this exemption can be extended for non-PSL (priority sector loans) loans.

This is subject to the condition that no third party other than the REs in a co-lending transaction have direct or indirect control over the flow of funds at any point of time.

In certain cases, such as loan products involving advances against salary, REs should ensure that LSPs do not have any control over the flow of funds directly or indirectly in such transactions, per the FAQs. It also has to be ensured that repayment is directly from the bank account of the employer to the RE.

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