What Does RBI’s Latest Digital Lending Guidelines Signify?

India’s digital lending market has grown considerably in recent years. Many fin-tech providers are offering easy loans to customers without collateral. While these loans are helpful for some customers who may be unable to get approved loans by a bank, the unregulated nature of this sphere proposed quite a few problems.

Violations of customer data privacy, extremely high-interest rates, aggressive loan recovery methods and other issues have plagued the digital lending sector in India for quite a while now.

So, now the government has decided to intervene and lay down laws to protect customers and provide ethical online lenders with more legitimacy. The new RBI regulations over digital lending will make the process more transparent and reduce the problem of customers ending up with unfeasible loans.

A Brief Summary of RBI Regulations for Online Lenders

These new rules  are designed to safeguard consumers against fraud  in the digital  lending space. People now have the choice of dealing with legitimate Regulated Entities (REs) and Lending Service Providers (LSPs) under the statutory laws.

REs will be authorised digital lenders, and all service providers working with them must be government-regulated LSPs. As the RBI rules start coming into effect, it will be highly beneficial for fin-tech firms to get RE status because customers will also have more confidence in them.

Let’s take a look at the crux of this new press release about digital lending and its intended purpose:

• The RBI allows REs to give loans and accept repayment directly to and from the customer’s bank account. There is no need for third-party involvement in this process.
• The RE, not the borrower, shall pay all fees, charges, etc., payable to LSPs in the credit intermediation process.
• The RBI has made it mandatory for REs to share a KFS (Key Facts Statement) about their online loan/credit product with the customer before finalising the deal.
• An extremely important section under the KFS will be the APR (Annual Percentage Rate) which will give customers an idea about the total cost of the loan, including all additional charges.

This is meant to provide customers complete clarity about the kind of financial commitment that they are getting into (misrepresentation  is one of the primary complaints against digital lenders).

• The RBI has prohibited fin-tech firms from raising a customer’s credit limit without their explicit consent.
• As per the new guidelines, REs will be expected to provide all customers with a cooling-off period/look-up interest phase where the customer will have the option to exit the loan contract by simply paying off the loan amount and proportionate APR.
• REs (& LSPs engaged by them) will require a nodal officer for complaint redressal per the new RBI guidelines.

Not only this, the information about the grievance redressal officer should be prominently visible on their website so that customers can easily contact them via the website.

• The RBI has laid down a 30-day period during which the REs will have to take action for grievance redressal after a complaint has been filed. If no action is taken during this period, the customer has the right to file a complaint with the RBI directly under their Integrated Ombudsman Scheme.
• Before collecting any information from the customer, the RE has to take explicit consent from the customer to ensure data security & privacy.

Moreover, a customer can revoke the permission (given to the RE/LSP for using their data) at any point of their contract/relationship with the concerned entities.

• The RBI has also stated that all REs and LSPs will have to provide complete detailed information about all digital lending activity (including short-term credits and deferred payment schemes) to companies collecting credit information. There can be no exceptions to this rule, irrespective of the length of tenure of the loans.

You can go through the press release for more details via this link.

Will the RBI Guidelines Be Effective?

The RBI guidelines above show that most of the attention has been paid to increasing transparency between customers and lenders about the digital lending process. This move has been made in light of the recent discovery that more than half the digital lenders operating in the country were involved in illegal practices.

With increased information in the form of KFS and APRs, customers will likely not fall into traps of debt that they cannot recover from. Data protection is also a major concern for the RBI since cybercrime via Digital Lending Apps (DLAs) has now become a significant threat to the safety of Indian civilians.

The RBI has also reserved some rights to gather information about the practices of these lending companies and to take action against lenders that do not satisfy all the regulatory guidelines.

The end goal of this system is to ensure that digital lending becomes a clean and regulated process that Indian citizens can use at their convenience without getting duped out of their hard-earned money. A regulated system will also bring in more customers and benefit digital lenders in the long run.

But these rules are new, and implementation has not yet begun, so customers and lenders need to be careful & avoid legal pitfalls. Customers should seek as much information as possible before signing the loan contract, and digital lenders also need to provide customers with as much standardised, accurate information as they can. The RBI may upgrade these regulations in the future as the digital lending market expands. Lenders must keep an eye out for these updates and modifications to retain their RE status.

Read here to learn about the mobile banking trends to look out for in 2022.

Final Thoughts

The rapid influx of RBI guidelines may have some digital lenders worried, but this action represents a huge advancement in the sector. The government accepts and acknowledges the digital credit market as a legitimate place of business by introducing rules. This simply hints that digital lending will only keep growing and becoming more popular in the coming years.

Right now, it is the most exciting phase of digital lending in India, and early birds that gain RE status and provide efficient service will be able to capture the lion’s share of this growing sector. Contact us for an end-to-end lending solution portfolio.