RBI issues strict norms for digital lending

In an effort to stop some players from engaging in illicit activity, the Reserve Bank of India (RBI) released the first set of guidelines for digital lending on Wednesday.

The central bank has strengthened a regulatory framework to facilitate the orderly growth of credit delivery through digital lending based on the recommendations obtained from the Working Group on “Digital Lending, including Lending through Online Platforms and Mobile Apps” (WGDL).

RBI had constituted a Working Group on digital lending including lending through online platforms and mobile apps’ (WGDL) on January 13, 2021. The guidelines, follow the recommendations of the working group for digital lending, whose report was made public in November 2021.

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What is Digital Lending process?

A remote and automated lending process, majorly by use of seamless digital technologies in customer acquisition, credit assessment, loan approval, disbursement, recovery, and associated customer service.

Guidelines for Digital Lending

• According to the RBI, all loan disbursements and repayments must be carried out exclusively between the bank accounts of the borrower and the regulated firm, without the use of a pass-through or pool account of the lending service provider (LSP) or any other party.
• The RE (Regulated Entities), not the borrower, shall pay all fees, levies, etc. due to LSPs in the credit intermediation process.
• The borrower must get a standard Key Fact Statement (KFS) before signing the loan contract.
• Borrowers must be informed of the total cost of digital loans in the form of the annual percentage rate (APR)6. APR must be included in KFS.
• Automatic increase in credit limit without explicit consent of the borrower is prohibited.
• The loan contract must include a cooling-off or look-up period during which borrowers can cancel their digital loans by paying the principle plus the appropriate APR without incurring any fees.
• The REs must make sure that they and the LSPs they have hired have a suitable nodal grievance redressal person to handle complaints relating to FinTech/digital lending. These grievances officers will also handle complaints against their respective DLAs. The Grievance Redressal Officer’s contact information must be prominently displayed on the RE website, its LSPs, and, if necessary, DLAs.
• if a borrower’s issue is not resolved by the RE within the allotted time frame (currently 30 days), he or she may file a complaint through the Reserve Bank Integrated Ombudsman Scheme (RB-IOS).
• Data gathered by DLAs must be needed-based, have transparent audit trails, and be used exclusively with the borrower’s express prior agreement.
• Borrowers may be given the choice of accepting or declining consent for the use of certain data, as well as the ability to revoke previously granted consent, in addition to the choice of having their data deleted by the DLAs/LSPs.
• Regardless of the type or duration of any lending obtained through DLAs, either those of the RE or the LSP the RE hired, REs are obligated to report such lending to credit information companies (CICs).
• The REs are required to report to CICs any new digital lending products they issue to merchant platforms that involve short-term loans or deferred payments

This move by the Reserve Bank of India came after some of the digital lending platforms were charging hefty interests from the borrowers. These guidelines will also make sure that the borrower is not exploited by unethical recovery processes being employed by these lenders.

Here is the circular issued by RBI:

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