Are digital lenders ready for the new RBI norms?

Updated On : Jan 2023

In a move to protect customers from steep interest rates charged by digital lenders and prevent unethical recovery of loans, the Reserve Bank of India (RBI) issued a framework of digital lending guidelines which came into effect from December 1, 2022.Fintech and other digital lenders are geared up to comply with the new regime which entails some short-term disruption and compliance costs.

Digital Lending is a boost to the financial industry in India as it facilitates easy accessibility, quick disbursal and helps lower costs. Lending Service Providers (LSPs) work in collaboration with Non-Banking Financial Companies (NBFCs) who disburse credit to customers using the former’s platform. However, these platforms often lend more than a borrower’s repayment capacity. They charge abnormally high interest rates, and use unethical practices or recovery of loans.

RBI’s new digital lending guidelines were issued in August 2022 and came into effect from December 1, 2022. These regulations were mandated to do away with the predatory digital lending practices in the country.The new regulations would streamline lending processes, disclosures, data gathering and protect customers from inflated interest rates and unscrupulous recovery of loans while minimizing the involvement of unnecessary third parties in digital lending transactions.

The guidelines will apply to new customers as well as all existing customers availing new loans.

Highlights of the Digital Lending Guidelines (DLG)

• Loan disbursal and repayment processes would take place between the loan borrowers’ bank accounts and Regulated Entities (REs) only, without the involvement of third-party LSPs.
• Lenders must keep the borrower informed about all fees and chargesin a standardised format.
• LSPs charges for credit intermediation will be paid directly by the bank and not the borrower.
• Lenders cannot auto-increase borrowers’ credit limits without their consent.
• There must be a cooling-off period of at least three days for loans having a tenor of seven days or more, and one day for loans having a tenor of less than seven days. The borrower can exit digital loans by repayment without penalty, during this time.
• It would be REs responsibility to ensure fairness on the part of LSPs or digital lending apps towards the borrowers, especially during debt collections.
• Any data collected by digital lending apps should be need-based and with the borrower’s prior consent.
• Banks and their partner LSPs must appoint a nodal grievance redressal officer to digital lending-related issues.
• Borrowers can complain to RBI’s Integrated Ombudsman Scheme if grievances are not resolved by the bank within 30 days.
• Regulated members must ensure all lending through digital lending apps have to be reported to Credit Information Companies (CICs).
• All Buy Now Pay Later (BNPL) lending needs to be reported to the CICs.

Changes the new guidelines will bring in

• There could be some short-term disruption in the short term and increased compliance costs, but lenders have prepared themselves to adhere to the new regime.
• There will be a boom in co-lending agreements, an increase in the quantum of loans disbursed by digital platforms which will increase the demand for loan portfolio security. Lenders will welcome digital solutions which will enable them to securitise their loan portfolios in the best way.
• Systems, including technology stacks, have prepared themselves to abide by the guidelines. A few workflows needed changes for digital lending companies. But it provided ashield for the industry, benefitting the entire ecosystem in the long term.
• While the new guidelines knit together the customer protection and partnerships framework between REs and LSPs, they also boost the market confidence of customers, lenders and other ecosystem players.
• DLG will create a dependable digital lending ecosystem for customers serving uniform and consistent experience.

In the last two years, the RBI has made commendable efforts for the benefit of consumers, creating regulations with consumer protection and transparency at its core. This has allowed the financial services sector to reimagine lending and borrowing processes. The new regulation will help towards an efficient and effective for all, transition into the future of digital lending.

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