RBI Issues First Set Of Guidelines For Digital Lenders

RBI releases first set of digital lending guidelines.

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The Reserve Bank of India on Wednesday accepted some of the recommendations made by a working group on digital lending in India. These recommendations will be implemented immediately, the regulator said.

"This regulatory framework is based on the principle that lending business can be carried out only by entities that are either regulated by the Reserve Bank or entities permitted to do so under any other law," the regulator said in its statement.

The working group's recommendations were first released on the RBI's website in November 2021, after which, comments were invited from stakeholders. After considering the comments, the regulator accepted some of the recommendations made by the group.

The central bank has mandated that all disbursal of loans must be conducted between the borrower's bank account and the regulated entity extending the loan. The funds should not be passed through any pool accounts of the lending service provider or any other third party helping the lender acquire the borrower.

An LSP is an agent of a regulated entity who carries out one or more of lender’s functions in customer acquisition, underwriting support, pricing support, disbursement, servicing, monitoring, collection, recovery of specific loan or loan portfolio, for a fee.

The RBI also said that any fees or charges, payable to lending service provider in the credit intermediation process shall be paid directly by the regulated entity and not by the borrower.

Among the other recommendations which will come into immediate effect are:

  • A standardised key fact statement must be provided to the borrower before executing the loan contract.

  • All-inclusive cost of digital loans in the form of annual percentage rate is required to be disclosed to the borrowers.

  • 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 shall be provided as part of the loan contract.

  • Lenders must ensure that they and their lending service providers have a grievance redressal officer in place to deal with fintech or digital lending complaints.

  • Complaints received by the grievance redressal officer must be resolved within 30 days, failing which, customers can place a complaint with the RBI's integrated ombudsman scheme.

  • Digital lending applications must collect customer data only after explicit prior consent. Such data collection must be need-based and have clear audit trails.

  • Option may be provided for borrowers to accept or deny consent for use of specific data, including option to revoke previously granted consent, besides option to delete the data collected from borrowers by the digital lending applications or lending service providers.

  • Any lending sourced through digital lending applications is required to be reported to credit bureaus, irrespective of the tenor of the loan.

  • All new digital lending products extended by regulated entities over merchant platforms involving short term credit or deferred payments are required to be reported to credit bureaus.

While the RBI accepted certain recommendations by the working group, others were either kept aside as they require further deliberation or working with the government.

The recommendations which require further deliberation include the following:

  • Each access/enquiry of credit information by any regulated entities or lending service providers from credit bureaus shall be conveyed to the borrower through mail or text message.

  • RBI to lay down baseline technology standards for digital lending applications.

  • Digital lenders should adopt ethical AI which focuses on protecting customer interest, promotes transparency, inclusion, impartiality, responsibility, reliability, security and privacy.

  • The recommendation pertaining to first loss default guarantee is under examination with the RBI. Meanwhile the lenders must ensure that any lending involving such contractual agreements must adhere to RBI norms on securitisation of standard assets.

The recommendations which require further discussion with the government include:

  • Balance sheet lending using digital lending applications to be restricted to entities regulated by RBI and to entities registered under any other law for specifically undertaking lending business.

  • Government may consider framing a legislation for Banning of Unregulated Lending Activities which would cover all entities not authorised by RBI and not registered under any other law for specifically undertaking public lending.

  • Formation of a independent body styled as Digital India Trust Agency to verify digital lending applications.

  • Setting up of a National Financial Crime Record Bureau.

  • Registrar of Companies may consider enhancing the use of digital technology and multiple data sources for early identification of shell finance companies and finance companies with proxy directors or opaque beneficial owners.

  • Registrar of Companies may also consider making suitable arrangements for real time data sharing with RBI on the de-listing of such shell companies to enable RBI to take further action.