Adoption of Digital Lending Guidelines  

Vaibhav Rathi

30 Mar, 2024

Digital lending is the practice of offering loans to clients while utilising technology and online platforms. This can include mobile apps, internet media, and online lending platforms. For underprivileged groups to have more access to credit and financial inclusion, the Indian government has been encouraging digital lending.

In addition, digital lending platforms are fostering healthy competition in the lending market, which lowers interest rates for borrowers and improves risk management. By analysing borrowers’ creditworthiness using cutting-edge technologies like big data, AI, and machine learning, these platforms can help lower the risk of loan defaults and increase the overall effectiveness of the lending process. In recent years, digital lending in India has expanded quickly as both new players and established financial institutions have embraced the technology.

The absence of regulation and monitoring in the digital lending industry, which may result in predatory lending practices and excessive interest rates for borrowers, is a source of concern. The Reserve Bank of India (RBI) finally introduced guidelines for digital lending in India to ensure consumer protection and mitigate the risks of fraud and deceptive lending practices. At first, the digital lending platforms were largely unregulated, but due to a lack of transparency and other disadvantages of this system, the RBI finally introduced these guidelines.

Digital Lending 

A remote and automated lending procedure known as “digital lending” makes extensive use of seamless digital technology for customer acquisition, credit assessment, loan approval, payout, recovery, and related customer care.

Digital Lending Apps/Platforms (DLAs) – User-friendly mobile and online applications that support digital lending services. Applications run by Regulated Entities (REs) as well as Lending Service Providers (LSPs) hired by REs for providing any credit facilitation services in accordance with current outsourcing standards outlined by the Reserve Bank will be included in DLAs.

Lending Service Provider (LSP) – An agent of a Regulated Entity who performs one or more of the functions of a lender on behalf of REs in accordance with the Reserve Bank’s current outsourcing guidelines, including customer acquisition, underwriting support, pricing support, servicing, monitoring, and recovery of a specific loan or loan portfolio.

Scope of Application

These rules apply to digital lending provided by: 

• All Commercial Banks,
• Primary (Urban) Co-operative Banks, State Co-operative Banks, District Central Co-operative Banks, and 
• Non-Banking Financial Companies (Including Housing Finance Companies).

Need for Regulation in the Digital Lending Market

To quickly distribute loans and reduce costs compared to the traditional lending industry, digital lending is a means of issuing and collecting loans through online platforms or mobile applications. To provide credit to borrowers using their platform, Lending Service Providers (LSPs) collaborate with Non-Banking Financial Companies (NBFCs). Some of these platforms, however, might engage in reckless lending by making loans to those who can’t afford to pay them back. 

In India, there have been numerous examples of dishonest business practices in the digital lending industry. These practices include things like high interest rates, unstated costs, aggressive marketing strategies, unauthorised access to personal information, and intimidation and harassment. Exorbitant interest rates charged by some lenders might make it challenging for consumers to repay their loans. Borrowers may find it challenging to compare various loan programmes since some lenders may not reveal all of the fees and charges related to their loans.

While some lenders have been accused of obtaining borrowers’ personal information without their permission, others have been accused of aggressive marketing strategies to attract consumers. It can be difficult for borrowers to negotiate this position since, in extreme circumstances, digital lenders have turned to harassment and intimidation to collect their loans. Because of this, there was a critical need for regulation in this sector, which ultimately manifested itself in the form of RBI rules.

Regulatory Framework

Reporting to Credit Information Companies (CICs) under the Regulatory Framework. REs must make sure that all lending completed through their DLAs and/or the DLAs of LSPs is reported to CICs, regardless of its nature or tenor, in accordance with the provisions of the Credit Information Companies (CIC) (Regulation) Act, 2005¹, Rules and Regulation 2006, and related guidelines issued by RBI from time to time.

REs must report to CICs any extensions of structured digital lending products made by REs and/or LSPs they have hired over a merchant platform that involve short-term, unsecured/secured credits or deferred payments. If there are any LSPs involved with such deferred payment credit products, REs must make sure that they adhere to the Reserve Bank’s current outsourcing rules.

Loss-sharing arrangement in the event of default: It is advised that REs adhere to the requirements of the Master Direction – Reserve Bank of India (Securitization of Standard Assets) Directions, 2021, dated September regarding the industry practice of offering financial products involving legal agreements such as First Loss Default Guarantee (FLDG), in which a third party guarantees to compensate up to a certain percentage of default in a loan portfolio of the RE.

Grievance Redressal

• Nodal Grievance Redressal Officer – REs will guarantee that they, as well as the LSPs they have hired, shall have a proper nodal Grievance Redressal Officer to handle FinTech/Digital Lending Related Complaints/ Issues Raised by Borrowers. The complaints against their respective DLAs would also be handled by this grievance redressal officer. On the websites of the RE, its LSPs, and DLAs, as well as in the KFS given to the borrower, contact information for grievance redressal authorities must be prominently displayed. Furthermore, the DLA and the aforementioned website will also have a complaint filing option. It is stated once more that the RE will continue to be in charge of resolving complaints. If the borrower’s concern against the RE or the LSP the RE hired is not resolved by the RE within the allotted time frame (currently 30 days), the borrower may file a complaint through the Reserve Bank-Integrated Ombudsman Scheme (RB-IOS) concern Management System (CMS) online. Complaints may be filed by entities that are currently not covered by RB-IOS in accordance with the Reserve Bank’s specified grievance redressal procedure.
• Loan Disbursal, Servicing, and Repayment: REs must make sure that all loan servicing, repayment, etc., is carried out directly by the borrower in the RE’s bank account, without the use of any pass-through accounts or pool accounts of any other party. Except for disbursals covered exclusively by statutory or regulatory mandate (of the RBI or any other regulator), the flow of funds between REs for co-lending transactions and disbursements for specific end uses provided the loan is disbursed directly into the bank account of the end-beneficiary, all disbursements must always be made into the borrower’s bank account. Except as specified in these guidelines, REs must make sure that no disbursal is ever made to a third-party account, including the accounts of LSPs and their DLAs.

Payment of dues, fees, etc.

• Fees and Charges: REs must make sure that any fees, charges, etc., due to LSPs are paid by them (REs) and not by the LSPs directly to the borrower.
• Penal Interest/Charges: Any penalties assessed to borrowers will be based on the amount of the loan that is still owed. Additionally, the borrower will get an annualised disclosure of the rate of these penal costs in the Key Fact Statement (KFS).

Conclusion

To ensure that this sector has consistent, long-term growth, RBI regulation of the digital lending market is essential. Short-term credit is the most common type of digital lending now in use, and people with low incomes or other financial difficulties typically use it. The expansion of the middle class, which is essential to building a robust economy, will undoubtedly be aided by providing short-term small credit facilities to underserved populations, but an unregulated lending market breeds dishonest business practices, which may make the concept of large-scale digital lending unreliable. Overall, the RBI’s initiatives have contributed to the creation of a regulatory framework for digital lending in India, increasing transparency and accountability in the industry and providing a level of oversight to assure customer protection.

FAQs: –

1. https://financialservices.gov.in/sites/default/files/CIC%20Act%202005.pdf