Borrow smart. RBI clarification on digital lending: Here’s about interest rates, charges and recoveries

The Reserve Bank of India (RBI), last September, unveiled a regulatory framework to make digital lending safe for members of the public. This came in the backdrop of concerns of unbridled engagement of third parties, mis-selling, breach of data privacy, unfair business conduct, charging of exorbitant interest rates, and unethical recovery practices. Just a few days ago, the lending watchdog came out with a frequently asked questions note that provides further clarifications on digital lending practices in multiple areas that would be of interest to borrowers. Here is a lowdown.

APR norms

The RBI had directed digital lenders that an all-inclusive cost of digital loans in the form of an Annual Percentage Rate (APR) is required to be disclosed to the borrowers. Now, in the case of floating rate loans, APR may be disclosed to borrowers at the time of origination based on the prevailing rate as per the format of Key Fact Statement (KFS). As and when the floating rate changes, only the revised APR may be disclosed to the customer via SMS/ email each time the revised APR becomes applicable.

Borrowers should understand that the insurance charges are included in the computation of APR only for the cover which is linked/integrated in loan products — the argument for such a move being that these charges are intrinsic to the nature of such digital loans, the RBI has said.

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 had been provided as part of the loan contract. The regulator has now said that ‘reasonable’ one-time processing fee can be retained if the customer exits the loan during cooling-off period. This, if applicable, has to be disclosed to the customer upfront in KFS. However, the processing fee has to be mandatorily included by lenders for the computation of APR.

Delinquency, recovery

In case of delinquent loans, Regulated Entities (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. REs have to ensure that any fees, charges, etc., payable to LSPs are paid directly by them (REs). These should not be charged by Lending Service Provider (LSP) to the borrower directly, or indirectly from the recovery proceeds.

At the time of sanction of loan, the borrower has to be conveyed the name of empanelled agents authorised to contact the borrower 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 have to be communicated to the borrower through email/SMS. This has to be done before the recovery agent contacts the borrower for recovery. The RBI could have given strict guidelines on recovery agent conduct.

Also, penal charges such as cheque bounce/mandate failure charges, which are necessarily levied on a per instance basis, shall not be annualised. However, these charges will have to be disclosed separately in the KFS under ‘Details about Contingent Charges’.

Grievance redressal

The regulatory framework is focussed on the digital lending ecosystem comprising RBI REs and the LSPs engaged by them to extend various permissible credit facilitation services.

The RBI has clarified that only those LSPs that have an interface with the borrowers would need to appoint a nodal Grievance Redressal Officer. But, do note that REs remain responsible for ensuring resolution of complaints arising out of actions of all LSPs engaged by them.

The principle underlying the Digital Lending guidelines is that an LSP should not be involved in handling of funds flowing from the lender to the borrower or vice versa. While entities offering only Payment Aggregators (PA) services shall remain out of the ambit of ‘Guidelines on Digital Lending’, any PA also performing the role of an LSP has to comply with the Digital Lending norms.

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