Guidelines to Regulate Digital Lending | 13 Aug 2022

For Prelims: Reserve Bank of India, Digital Lending, Integrated Ombudsman Scheme of RBI

For Mains: Concerns related to Digital Lending and steps taken by government in this direction

Why in News?

Recently, the Reserve Bank of India (RBI) issued the first set of guidelines for digital lending, to crack down on illegal activities by certain players.

  • Towards addressing concerns that had sprung up, the RBI had constituted a Working Group on ‘digital lending including lending through online platforms and mobile apps’ (WGDL) in January, 2021.
  • The group has proposed stricter norms for digital lenders in November 2021, some of which have been accepted and included in the new norms while others are under examination.

What do we Know about Digital Lending?

  • About:
    • It consists of lending through web platforms or mobile apps, by taking advantage of technology for authentication and credit assessment.
    • Banks have launched their own independent digital lending platforms to tap into the digital lending market by leveraging existing capabilities in traditional lending.
  • Significance:
    • Financial Inclusion: It helps in meeting the huge unmet credit need, particularly in the microenterprise and low-income consumer segment in India.
    • Reduce Borrowing from Informal Channels: It helps in reducing informal borrowings as it simplifies the process of borrowing.
    • Time Saving: It decreases time spent on working loan applications in-branch. Digital lending platforms have also been known to cut overhead costs by 30-50%.

What are the Highlights of the Guidelines?

  • For Loan Disbursals and Repayments:
    • All loan disbursals and repayments will be required to be executed only between the bank accounts of the borrower and the Regulated Entities (RE) without any pass-through or pool account of the Lending Service Providers (LSP) or any third party.
      • Regulated Entities include a bank or a non-banking financial company.
  • Regarding Payment:
    • The new rules mandate that fees or charges payable to LSPs in the credit intermediation process will be paid directly by the bank or Non-Banking Financial Companies (NBFCs) and not by the borrower.
  • Regarding Loan Disclosure:
    • All-inclusive cost of digital loans in the form of Annual Percentage Rate (APR) is required to be disclosed to the borrowers.
  • Regarding increase in Credit Limit:
    • The new norm prohibits any automatic increase in credit limit without the explicit consent of the borrower.
  • Regarding Exiting Digital Loans:
    • It also provides, as part of the loan contract, a cooling-off/ look-up period during which the borrowers can exit digital loans by paying the principal and the proportionate annual percentage rate without any penalty.
  • To Protect Data Privacy:
    • To protect data privacy, the data collected by digital lending apps has to be need-based, with the customer’s prior consent, and can be audited, if required.
  • Grievance Redressal Officer:
    • Banks will have to ensure that they, and the LSPs engaged by them, must have a suitable nodal grievance redressal officer to deal with fintech- or digital lending-related complaints.
    • This officer will also deal with complaints against their respective Digital Lending Apps (DLAs).
    • Current guidelines allow for the borrower to complain to the Integrated Ombudsman Scheme of the RBI if their grievance was not resolved by the bank within 30 days.
  • Reporting of Loans:
    • REs are required to ensure that any lending done through DLAs has to be reported to Credit Information Companies (CICs), irrespective of its nature or tenor.
    • More importantly, lending through the Buy Now Pay Later (BNPL) model also needs to be reported to CICs.

Who comes under RBI’s New Purview?

  • While announcing the norms, RBI classified digital lenders into three categories.
    • Entities regulated by the RBI and permitted to carry out lending business.
    • Entities authorized to carry out lending as per other statutory or regulatory provisions but not regulated by RBI.
    • Entities lending outside the purview of any statutory or regulatory provisions.
  • The central bank’s regulatory framework is focused on the digital lending ecosystem of regulated entities and the LSPs engaged by them to extend various permissible credit facilitation services.
    • However, the lenders in the other categories do not come under the new guidelines and can consider formulating appropriate rules and regulations on digital lending based on the recommendations of the working group.

What is the Need for Such Guidelines?

  • With the advent of technological innovation, there has been immense development in the digital lending ecosystem, which has resulted in several fintech firms extending credit services.
  • However, this growth has led to mis selling to unsuspecting customers, unethical business conduct by digital lenders and excessive engagement of third parties, and concerns over data privacy of the borrower.
  • There have also been several complaints by consumers that digital lending apps are charging exorbitant interest rates or they were committing fraud, among others.

Way Forward

  • India is on the verge of a digital lending revolution and making sure that this lending is done responsibly can ensure the fruits of this revolution are realized.
  • Digital lenders should proactively develop and commit to a code of conduct that outlines the principles of integrity, transparency and consumer protection, with clear standards of disclosure and grievance redressal.
  • Apart from establishing technological safeguards, educating and training customers to spread awareness about digital lending is also important.

Source: TH