RBI tells digital lending apps who is the boss; empowers borrowers

Unregulated loan apps can no longer harass borrowers to make payments as the long-awaited and much-needed regulatory framework for digital lending has been released by the Reserve Bank of India which addresses concerns relating to engagement of third parties, mis-selling, breach of data privacy, charging of exorbitant interest rates, and unethical recovery practices.

The framework is based on the principle that lending business can be carried out only by entities that are either regulated by the central bank or entities permitted to do so under any other law. Among the various measures, the regulation states that an automatic increase in credit limit without explicit consent of the borrower is prohibited. Any fees or charges payable to Loan Service Provider (LSPs) in the credit intermediation process shall be paid directly by the Regulated Entity (RE) and not by the borrower.

“We heartily welcome the recommendations of the RBI Working Group on Digital Lending – Implementation as a framework for digital lending in India. These have been long-awaited and much-needed directions that will help support orderly growth of credit delivery via the digital lending methods revolutionised by India’s fintech players. Most directives have a direct customer impact and do much to secure customer interests. For instance, all lending sourced through digital means is required to be reported to the CICs regardless of the nature or tenor. This will benefit all prudent consumers paying back their loans, including short-term consumer loans, by giving them a clear insight into their overall credit burden. The standardised Key Fact Sheet for borrowers will increase the transparency and make it easier for borrowers to understand what the loan entails," says Adhil Shetty, CEO, BankBazaar.com.

The Reserve Bank had constituted a Working Group on ‘digital lending including lending through online platforms and mobile apps’ (WGDL) on January 13, 2021. The recommendation also states that  “REs shall ensure that they and the LSPs engaged by them shall have a suitable nodal grievance redressal officer to deal with FinTech/ digital lending related complaints.

Such grievance redressal officer shall also deal with complaints against their respective Digital Lending Applications (DLAs). The details of the Grievance redressal officer shall be prominently indicated on the website of the RE, its LSPs and on DLAs, as applicable. As per extant RBI guidelines, if any complaint lodged by the borrower is not resolved by the RE within the stipulated period (currently 30 days), he/she can lodge a complaint under the Reserve Bank – Integrated Ombudsman Scheme.”

Saurabh Puri, Chief Business Officer, Credit cards, Zaggle says, “Digital Lending Applications powered by Fintechs and Regulated Entities has brought in innovation in the financial system. The Digital Lending Applications uses the power of data and tech capabilities to make the customer experience of borrowing seamless. Lenders and borrowers benefit from seamless customer acquisition, credit assessment, loan approval, disbursement, repayment, and customer service. However, there are certain concerns that have emerged that include breach of data privacy, unfair business conduct, charging of exorbitant interest rates, and unethical recovery practices. RBI’s guideline on digital lending is a step towards curbing these concerns. We at Zaggle feel that these guidelines will bring transparency and enhance customer confidence. The guidelines also demarcate the roles and responsibilities of Regulated Entities and LSPs. Overall, this will help the industry grow in an orderly fashion; yet encouraging innovation.”

Gaurav Chopra, Founder and CEO of IndiaLends says, “Issues related to lack of transparency, data protection and privacy, as well as user consent have been contentious issues, and these are precisely the problems we’ve looked to solve since inception. We’re glad that there’s an able working group who understands consumers issues as well as the digital lending landscape. They have given a set of fair recommendations, which the RBI has accepted. This shall only boost the consumers' confidence and trust in the credit system, and will allow players like us to continue our business without any changes to the business model.”

What changes for fintechs post the norms? How will the approved norms help them? The expert says this is akin to the early years of Unit Linked Insurance Plan (ULIPs), when lack of regulation led to unhealthy practices such as exorbitant commissions, giving the industry an ill repute. Once regulated, there was an overall acceptance of ULIPs as an investment instrument resulting in a healthy growth. 

"From fintechs’ perspective this is a positive move that offers clear visibility into the facets that RBI has already planned as well as the aspects that need deliberation. This will increase acceptance of borrowing though non-traditional channels that provide quick and efficient access to credit. It will also increase acceptance among the unorganised sector and for regulated buy now pay later products. In addition, the regulations will help channelise the disruptive nature of fintechs while regulating its risks. The direct lender-borrower interaction by elimination of pooled accounts will make fintechs more acceptable to the market place," says Sanjay Kao, EVP Asia-Pacific (APAC), Lentra, which offers banks instant lending solution. 

Also read: RBI tightens scrutiny over digital lending apps

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