Digital Lenders Association issues a new Code of Conduct

Ashish M. Shaji

03 Sep, 2020

The Digital Lender Association of India (DLAI) recently came out with new guidelines to promote responsible lending and ethical collection practices, especially during this challenging economic environment due to the Covid-19 pandemic. This new code of conduct is a set of principles and guidelines that is binding on all DLAI members.

What is the Digital Lending Association of India?

Digital Lending Association of India is an association of 81 fintech entities, which includes Systematically Important Non-Deposit taking NBFCs. Its members have disbursed more than 200000 crore rupees collectively in the last five years to more than 50 million urban small borrowers in 1500 cities /towns in India. 

The borrower profile of their member institutions varies from micro manufacturing units (textiles, food processing, industrials, engineering, chemicals, etc.) to small mom and pop stores like Kirana, hardware shops, scrap dealers, etc.

On the retail side, the members of this association lend to the employees of non-rated corporate and self-employed professionals for medical emergencies, for education, marriage, and travel. Over 50% of the borrowers serviced are new to credit and have been refused formal credit by traditional financial institutions.

What is the main objective of the Code of Conduct released by the Digital Lenders Association?

The main purpose of this code of conduct is to ensure that the digital lending industry builds common safeguards of customer interests. For instance, the new guidelines state clearly that a lender cannot build unethical features into their products like excessively high (and Non-transparent) late payment fees.

With recent high growth witnessed in the digital lending industry in India, there is a need for industry participants to maintain a strong code that will prevent the rise of unscrupulous practices that can harm the industry, thereby reducing customer confidence.

Compliance of the Code of Conduct (COC) by the members

• The members are required to agree in writing to adhere to the COC at the time of membership and renewal of membership.
• They are also required to provide their immediate acceptance of the COC for continuing with their membership.
• Every member will provide the name of a person in its organization to DLAI, who shall be responsible for reporting to the Digital Lenders Association on the adherence to the COC.
• Every member is required to submit an annual confirmation to the Management Committee in writing on its compliance with the code in a manner as required by the Management Committee. 

Consequences in case of non-compliance with the COC by the members

In case of non-compliance with the COC, the management committee will be entitled to initiate the following actions against the non-compliant member:

• Cancellation of its membership with DLAI;
• Such member can be barred from future membership and or can be barred from participating in its events for a period;
• The fact of such cancellation and debarment shall be put on DLAI website, and all members shall be notified of the cancellation of the membership; and
• It can also report any serious violation of the COC to the appropriate authorities, including RBI^[1].

Essential elements of the Code of Conduct

Some of the essential elements are as mentioned below:

• Obligation to adhere to all applicable laws

Every member is required to comply with all provisions of all applicable laws and regulations.

• Transparency of product, pricing, and services

Members should offer products and services that are not misleading. Members must strive to provide relevant information in a language that their customers can understand.

• Fair treatment of customers

Every member should have a board-approved fair practices code and ensure that its employee, staff, etc. comply with it. They are required to adopt ethical practices that treat their customers with dignity and not harass or intimidate them.

• Lending within affordability limits

According to the code, the member should look to make fair income and affordability assessments of customers and ensure that financial products and services are not in excess of a customer’s capacity. 

• Disclosure of terms, conditions, and obligations to the customer

The member should ensure that detailed terms and conditions of the financial products and services are provided to the customer at all points. A loan agreement should also be provided to the customer that lays down the obligations and commitments of the customer and the lender’s commitment. The member must also disclose all costs to customers arising from financial products or services.

• Pricing and cost of credit

Members are not permitted to design such pricing models that are “predatory” or “usurious” where there is any kind of deception in the presentation of costs or fees or the cost or fee structure that are confusing and designed to extract maximum revenue without consideration of customer understanding. Further, members must disclose the annual interest rate for loans.

• Collections and servicing

The member is required to inform about loan payments due and outstanding loan amounts in a manner that is clearly understood by customers. The member should ensure that there is no harassment or intimidation of customers, including practices like calling any family member of the customer. The member is required to ensure that their staff, agents, and representatives are trained to deal with the customers.

• Customer grievance management

Every member is required to have a board-approved policy to address customer complaints fairly. An efficient mechanism shall be put in place by a member for the implementation of such a customer complaint policy and for its resolution.

Conclusion

Read our article:All About Digital Lending and Its Business Models