The Reserve Bank of India’s new digital lending rules lay emphasis on three flanks: customer protection and conduct; technology and data requirements; and regulatory framework. To some extent, these will alter the digital lending paradigm in the near term. They also underscore the central bank’s resolve to protect consumer interest.

Over the past couple of years, digital lending has taken off in India with the influx of a number of ‘fintechs’. Because of the market opportunity, most have attracted quality equity investors and built sufficient capital buffers. That should help them tide over the challenges ahead as they conform to the plethora of guidelines.

In terms of consumer protection and proper conduct, the RBI has made sure that transparency and consumer awareness take centre-stage. While a lot of the guidelines were already being practised by players, some will require a rejig in the business model.

For instance, the mandated direct transfer of funds between lender and borrower accounts without the medium of an escrow or third party will lead to a change in the ‘buy now, pay later’ and prepaid card models in a number of instances, which were operated by lenders through escrow accounts.

The RBI has also unequivocally said that the onus of storing customer data lies on the regulated entities, and they need to take prior consent of borrowers.

Disclosure of charges

While the clear disclosure of all charges as well as the annual percentage rate (APR) to the end-borrower will enhance transparency, the availability of the APRs upfront could affect the disbursements of some lenders. To be fair, a lot of them do disclose most of their charges upfront.

It must be noted that the target borrower segment for these lenders is not catered to in a big way by banks/larger NBFCs. Hence, sensitivity to interest rates remains low for these borrowers. The availability of information upfront, however, could make it difficult for lenders to retain customers as it will allow borrowers to check the total annual costs implied on them and compare them effectively with other alternatives.

What will also be tricky is the cooling-off period which will allow the borrower to exit the loan without any penalty while paying the proportionate APR and principal. Nevertheless, given that majority of the loans extended by digital lenders are of short tenure, the cooling-off period, which will be defined by the regulated entity’s board, is unlikely to have any material impact on the business model.

That said, some changes will have to be made with respect to the loan service providers (LSPs) that these lenders associate with. In general, the industry operates on a parent-subsidiary model wherein the technology platform, which forms the crux of the lending as well as marketplace in some cases, is housed at the parent level with the lending entity as a subsidiary.

Lenders will also have to incorporate changes in terms of data and data sharing, which, while being operationally intensive, are unlikely to cause any fundamental shifts in the business.

To be sure, the restriction on the ability of lenders to scrub the mobile phones of borrowers will lead to a major rejig in credit underwriting practices. The entire ethos of lending via the digital route hinges on the ability to look through alternative data sources, some of which is unstructured, to arrive at a lending decision.

Therefore, these lenders consider many variables and phone scrubbing was an integral part of the underwriting journey of a borrower, primarily in the context of consumer loans. The underwriting processes will now need to be adjusted to align better with the regulations.

Regulations on reporting of defaulting borrowers to credit bureaus are already being followed by most lenders.

The RBI is clearly focussed on ensuring stability in the Indian financial markets and the digital lending regulations aim to usher in orderly growth and financial stability, check malpractices, strengthen transparency, and protect customer interests.

The writer is Senior Director and Deputy Chief Ratings Officer, CRISIL Ratings Ltd

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