Decoding RBI's Digital Lending Directions: Tightrope For Fintechs

On May 8, 2025, the Reserve Bank of India notified the RBI (Digital Lending) Directions, 2025 (Directions). These directions replace the Digital Lending Guidelines, 2022 (DL Guidelines), along with other related instructions on digital lending (collectively, the earlier instructions).

This move marks the RBI's continued efforts to strengthen the regulatory framework for DL in India. Importantly, the directions do not seek to disrupt or overhaul the existing regulatory framework. Rather, they refine compliance requirements and operational considerations, while maintaining the overall structure of DL regulations in India.

While the directions apply to all entities previously covered under the DL Guidelines, they now extend to All India Financial Institutions as well. Previously, the AIFIs could participate in DL without adhering to the same standards of transparency, consumer protection, and risk management applicable to other REs — a gap which is now addressed.

With super apps gaining pace, clarity was needed on whether platforms offering lending among several features qualify as DL Apps.

The Directions (in line with RBI’s earlier clarifications) now explicitly recognise that the scope of DLAs includes both standalone lending apps and those embedded within super apps.

The core principle remains unchanged: while the RE may engage an LSP as an outsourced partner, the RE retains full responsibility for the lending activity. However, the directions impose additional compliance requirements on the REs, including a requirement to enter into formal contractual arrangements with each LSP.

Although executing such contracts is already standard practice within the financial sector, the explicit requirement eliminates any ambiguity surrounding informal or "handshake" arrangements.

Additionally, REs are now required to maintain an up-to-date website and implement appropriate monitoring mechanisms for loan portfolios originated through LSPs. As maintaining an online presence is already a common practice amongst REs, the formalization of this requirement is unlikely to pose any significant operational challenge.

To enhance borrower protection while mitigating the risk of non-performing assets, the directions require REs to maintain key economic profile details of borrowers and also inform them of the available grievance redressal mechanisms.

From a practical standpoint, this raises the question of whether DLAs will now need to display additional information beyond what was previously mandated.

The directions introduce a strengthened reporting obligation for REs, mandating the reporting of all DLAs on the Centralized Information Management System. Through this mandate, the RBI appears to be establishing an indirect oversight mechanism over DLAs, many of which may otherwise fall outside its regulatory perimeter. While REs were already required to contractually flow down compliance obligations to DLAs, this move effectively closes the loop by ensuring that the RBI is informed of these arrangements.

In the evolving fintech landscape, borrowers increasingly rely on platforms operated by LSPs to access and compare financial products from multiple REs. To ensure these arrangements do not compromise borrower choice or give preferential treatment to any RE, the directions mandate the certain safeguards to preserve the neutrality of LSP platforms by discouraging any form of preferential treatment towards a specific RE and preventing market capture by any single RE.

The Directions introduce two significant revisions:

• Increase in a borrower's credit limit must be supported by an explicit request from the borrower.

• Data processed outside India must be deleted from foreign servers within 24 hours of processing.

• REs should review their consent workflows and data localisation practices, particularly where REs rely on global cloud infrastructure or offer pre-approved credit limit increases.

While the directions aim to enhance transparency and standardisation, several provisions present interpretational and operational challenges for industry players, including:

• Ranking and neutral presentation: For platforms engaging with multiple lenders, the requirement to present offers in an unbiased manner raises ambiguity around whether the LSPs may filter out lenders that do not match a borrower’s specific request, or whether such filtering could breach neutrality obligations.

• Applicability to BNPL and other hybrid products: Although merchant buy-now-pay-later and credit card EMI products are excluded from the directions, the distinction becomes unclear in hybrid models that combine BNPL with term loans or digital credit lines.

• Definition and structuring of LSPs: It remains uncertain whether an LSP can leverage another LSP to perform certain functions, such as KYC, without falling foul of the compliance framework.

• Timing of Key Fact Statement Disclosures: The requirement to display the KFS, prior to the borrower selecting a lender poses a practical hurdle, as these details are typically generated only after a borrower accepts a formal offer from the lender.

For businesses operating in this space, this is an opportune moment to re-evaluate existing arrangements, clearly define stakeholder roles, and understand the obligations now attached to each role under the revised framework. Aligning with these expectations will be critical to ensuring sustained compliance and operational readiness.

That said, several practical challenges remain, including ambiguities around the ranking of lenders, treatment of hybrid credit models, multi-layered LSP structures, and the timing of key disclosures. Further regulatory clarity on these issues will be essential to facilitate smooth implementation and enable industry participants to align fully with both the letter and spirit of the directions.

Harsh Walia is a partner; Rupendra Gautam is a senior associate; and Sanskriti Shrivastava is an associate at Khaitan & Co.

Disclaimer: The views expressed here are those of the authors and do not necessarily represent the views of NDTV Profit or its editorial team.