The Reserve Bank of India (RBI) on Wednesday unveiled a regulatory framework to make digital lending safe for members of the public in the backdrop of this mode of lending gaining traction and sharp practices coming to the fore.

The regulatory framework is focussed on the digital lending ecosystem comprising RBI Regulated Entities (REs) and the Lending Service Providers (LSPs) engaged by them to extend various permissible credit facilitation services.

Regulatory norms

Under the framework, all loan disbursals and repayments are required to be executed only between the bank accounts of the borrower and the RE, without any pass-through/pool account of the LSP or any third party.

RBI said any fees, charges, payable to LSPs in the credit intermediation process shall be paid directly by RE and not by the borrower. A standardised Key Fact Statement (KFS) must be provided to the borrower before executing the loan contract.

The all-inclusive cost of digital loans in the form of an Annual Percentage Rate (APR) is required to be disclosed to the borrowers. APR should also form part of KFS.

The framework prohibits automatic increases in credit limits without the explicit consent of the borrower. It prescribes a cooling-off/look-up period during which the borrowers can exit digital loans by paying the principal and the proportionate APR without any penalty, which shall be provided as part of the loan contract.

REs have to ensure that the LSPs engaged by them have a suitable nodal grievance redressal officer to deal with FinTech/digital lending related complaints. Such a grievance redressal officer should also deal with complaints against their respective Digial Lending Applications (DLAs).

Joginder Rana, Vice-Chairman and Managing Director, Cashe said: “The RBI has laid out clear guidelines as well as future direction for digital lending. While it will lead to a marginal increase in the cost of operations for some of the lenders, overall it will bring a lot of credibility to the ecosystem.

“This will improve standardisation and the overall customer experience.”

He noted that the cost of operations will marginally go up for some of the digital lenders in terms of minor tweaks they will need to make in mobile apps, make some disclosures, etc.

12x growth in disbursements

According to RBI’s working group on digital lending, the overall volume of disbursement through digital mode for the sampled entities (public sector banks, private sector banks, foreign banks, and NBFCs) exhibited a growth of more than twelvefold between 2017 and 2020 (from ₹11,671 crore to ₹1,41,821 crore).

The major products disbursed digitally by banks are personal loans, followed by SME loans. A few private sector banks and foreign banks are also offering Buy Now Pay Later (BNPL) loans. 

The majority of loans disbursed digitally by NBFCs are personal loans, followed by other loans (which primarily include consumer finance loans).

RBI’s framework seeks to address concerns primarily related to unbridled engagement of third parties, mis-selling, breach of data privacy, unfair business conduct, charging of exorbitant interest rates, and unethical recovery practices.

As per the framework, data collected by DLAs should be need-based, should have clear audit trails, and should be only done with the prior explicit consent of the borrower.

Borrowers could be provided an option to accept or deny consent for the use of specific data, including an option to revoke previously granted consent, and an option to delete the data collected from borrowers by the DLAs/LSPs.

Any lending sourced through DLAs (either of the RE or of the LSP engaged by RE) is required to be reported to Credit Information Companies (CICs) by REs irrespective of its nature or tenor.

Further, all new digital lending products extended by REs over merchant platforms involving short-term credit or deferred payments are required to be reported to CICs by the REs.

Gaurav Chopra, Founder and CEO of IndiaLends, said: “Most new customers today are borrowing for the first time, and a growing share is coming through digital channels. That’s where we believe a framework ensures responsible players are rewarded for working in the interest of the consumer.

“This shall only boost consumers’ confidence and trust in the credit system.”