A year after insisting that banks should rely more on in-house mobile applications or apps to spread their digital presence rather than depending on third-party apps, it is learnt that the banking regulator is yet again tightening the norms around digital acquisition of customers, particularly for retail loan products.

Highly placed sources say the Reserve Bank of India has asked banks to trim their tie-ups with third-party fintech apps, especially where the bank is a lender to or equity investor in the fintech and holds substantial interest. For instance, if a bank has extended credit, whether as working capital facility or term loan, to a fintech and the bank’s exposure to the fintech’s overall borrowings is 10 per cent or more, then it cannot use the fintech to source loans.

Likewise, when a bank has 10 per cent or more of equity investment in a fintech, it cannot use the platform to sell its banking products.

Sourcing of loans though digital apps has always been a contentious issue for RBI. In fact, in November 2021, the working group report on digital lending had raised red flags on some of these aspects and pitched for preventing regulated entities (banks/ NBFCs) originating loans from unregulated entities (fintechs).

Final guidelines on digital lending are expected soon.

Risk of evergreening

Meanwhile, with the RBI’s ongoing annual inspection of banks revealing deficiencies in their loan origination practices, has prompted the regulator to step in before the guidelines can be issued.

It has apparently been uncovered that there were significant instances of evergreening in retail loans. Detailed analysis of certain loan accounts has revealed that a borrower may be meeting the EMI obligation by availing of short-tenure loans from fintechs apps.

Such instances, which tantamount to  evergreening in banking parlance, were particularly noticeable in housing loans, according to highly placed sources. The review process has also brought to the fore the fact that the fintech and the individual customer may be borrowers of the same bank and the customer may have availed of a personal loan from the app to pay the EMI obligation.

Why the RBI clampdown?
- RBI’s annual inspection of banks has revealed deficiencies in digital loan origination practices
- The bank may be a common lender for the fintech and a retail loan customer
- Fintechs active in the small-ticket loans segment
- Nov’21 working group report on digital lending raised red flags on loan origination agreements between banks and fintech

“While these may not be a deliberate case of evergreening, the impact on the bank will be the same if there is a default,” said a senior official privy to the matter. Fintechs mostly focus on personal loans with ticket size of Rs 10,000–Rs 70,000. Banks engage with third-party apps for these small ticket loans as it they are cost-effective.

Among private banks, IDFC First, Federal Bank and RBL Bank extensively partner with fintechs to distribute their loans. Likewise, among NBFCs, Aditya Birla Capital and Piramal Capital are active in originating loans through third-party apps.