India’s digital lending market has grown exponentially in the last decade, from a modest $9 billion to nearly $270 billion in 2022. But the sector was largely unregulated.
The digital lending guidelines, which took effect on December 1, 2022, are considered a proactive and progressive step by the Reserve Bank of India (RBI) as the country’s credit system custodian.
The new rules are intended to protect customers’ interests, improve transparency in the digital lending system, and facilitate the healthy and orderly growth of the sector. The RBI aims to effectively endorse digital lending activities in India and assumes responsibility for this innovative credit mechanism, boosting consumer confidence in the industry.
In this blog post, we will discuss some key terminologies and analyse key points of the supplementary FAQs.
The Glossary of 8 Must-know Digital Lending Terms
This section will help readers comprehend some of the key terms and concepts that are being dealt with in this circular.
1. Annual Percentage Rate (APR)
APR is the interest rate of a loan charged to the borrower annually.
2. Cooling off period/ Look-up period
It is the time that should be provided to the borrower to exit an existing digital loan if he does not wish to continue with it. The RE’s Director Board determines the duration.
3. Digital Lending
An automated process that essentially uses seamless digital technology for granting and recovering loans. It manages the lending life cycle using web or mobile platforms.
4. Digital Lending Apps (DLAs)/ Digital Lending Platforms
Mobile or web-based applications that facilitate the digital lending process. The applications (apps) are operated either by the REs or by service providers entrusted by REs known as the LSPs.
5. First Loss Default Guarantee (FLDG)
FLDG is an agreement between a lender and a third party in which the third party undertakes to compensate the lender for defaults in the lender’s loan portfolio for up to a predetermined percentage.
6. Key Facts Statement (KFS)
A key facts statement is a printed communication to be given to the borrower that contains all the details about the digital loan being availed, including its amortisation schedule. The circular provides the format of KFS as an annexure.
7. Lending Service Provider (LSP)
LSP is an outsourced service partner of the regulated entity that performs one or more of the RE’s digital lending functions under the prevailing guidelines.
8. Regulated Entities (REs)
The term “RE” refers to both banks and non-banking organisations that the RBI has authorised to carry out the activity of digital lending.
An Addendum to the Digital Lending Guidelines
The RBI has compiled a list of the most frequently asked questions about the new guidelines as a FAQ on its website.
These frequently asked queries help fill in some gaps in the new circular and bring further clarity to the new digital lending norms.
Some key specifics are summarised below:
1. According to the circular’s definition of digital lending, a lending activity falls into the digital lending category if it ‘largely’ uses digital technology in the lending process, even if there is some physical interface with the borrower.
2. Service providers engaged by REs who provide credit intermediation services that do not meet the definition of ‘digital lending’ are not designated as LSPs.
3. Only those LSPs with a direct interface with the customer need to appoint nodal Grievance Redressal Officers. However, the onus of complaint resolution lies with the REs for all actions of their partner LSPs.
4. EMI programmes on credit cards falling under the purview of the “Master Directions– Credit Card and Debit Card, Issuance and Conduct Direction, 2022” will not be covered under the digital lending guidelines.
However, loan programmes offered on debit cards, including those with EMI facilities and all other credit facilities extended on credit cards not covered by the aforementioned Master Direction, will be governed by the new rules.
5. In the case of floating rate loans, any changes in the APR must be intimated to the borrower through SMS or emails whenever there is a revision.
6. Transferring money related to loan disbursal and repayment must happen directly between the RE (lender) and the customer. LSPs, including payment aggregators (PAs), must not be involved in handling funds.
7. If the situation calls for it, REs can use a physical interface to collect cash on delinquent loans. Loan repayments recovered in cash are exempt from the requirement of direct loan repayment via digital modes. The loan account of the borrower must be updated to reflect the recovery.
8. The guidelines apply to all lending transactions that meet the definition of digital lending and occur on all digital platforms, including mobile banking apps and banks’ websites.
9. The amount in default will serve as the maximum amount on which penal interest/ charges are imposed.
10. Cheque bounce or mandate failure fees charged by instance will not be annualised.
11. If the customer withdraws from the loan arrangement during the cooling-off period, the REs can retain a reasonable one-time processing fee. This should be communicated to the customer in advance via the KFS.
12. At the time of sanction, the borrower should be informed of the details of the empanelled recovery agents. If a loan becomes delinquent and the RE assigns a recovery agent, the borrower must be notified of the agent’s details via SMS or email. This must be completed before the agent contacts the borrower to begin the recovery process.
The Indian digital lending industry saw tremendous progress in the last two years, and Fintech players are preparing for a bright future.
RBI has also stepped up its role as the regulator by introducing important regulatory changes in the sector. Some may consider the RBI’s scrutiny of lending apps too intrusive. The complaints originate mainly from the need to change the existing business model to comply with the new standards.
However, RBI’s new Digital Lending Guidelines are the right step toward developing a transparent, productive economic credit system.
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