Third Party Out of Digital Lending Process

In an attempt to address concerns arising from credit delivery through digital lending/funding, the Reserve Bank of India (RBI) took out a set of guidelines with the purpose of firming up the regulations for such activities. The guidelines are aimed at increasing regulatory compliance and making the process more transparent, whilst providing the customer with more discretion.

The RBI has clarified that lending can be carried out only by regulated entities (REs), i.e., entities regulated by the RBI or permissible by law. For this purpose, the RBI has established three separate categories:

• RBI regulated entities;
• Entities unregulated but authorized for lending;
• Entities lending outside the purview of any statutory/regulatory provisions or rules.

 

Why do the Guidelines apply to the first category only?

The new guidelines are applicable only to RBI regulated entities. The classifications were made by the RBI on the recommendations of the ‘working group’ that was established for the digital lending ecosystem in late 2021. Whilst the first category is regulated by the RBI itself, the remaining two are directed to follow the guidelines made by the respective authorities, i.e., regulator/controlling authority/central government based on the report of the ‘working group’ formed last year.
 

What are the key changes?

The following changes have been established by the new guidelines:

• Payment directly to bank account: The RBI has mandated that all loans disbursals and repayments are processed between the accounts of the borrower and the RE.
• Key Fact Statement (KFS): All lenders must provide a standardized ‘Key Fact Statement’ prior to the execution of the loan contract. All borrowers or customers must be provided with an Annual Percentage Rate (APR) that includes all fees and the total cost of the digital loan mentioned within the KFS.
• Cooling-off Period: All such digital loans must be provided with a cooling-off period that can allow the borrower to pay the principal and/or proportionate APR without any penalty. The cooling-off period should be mentioned in the loan contract; minimum period of 90 days.
• Grievance Redressal Officer: All REs and Lending Service Providers (LSPs) are mandated to appoint a nodal grievance redressal officer to deal with all digital lending related complaints.
• Reporting to Credit Information Companies (CICs): Any lending through Digital Lending Apps (DLAs) will require reporting it to CICs by the REs. The nature or purpose of the lending is irrelevant; it simply must be reported.  
• Mandatory Due Diligence: Before entering into a partnership with LSPs/DLAs, all REs must conduct a thorough due diligence on their data privacy and storage policies and ensure that they adhere to the new guidelines on personal data collection.

What is not permissible?

The following steps are no longer permissible liberally:

• Credit Limit: REs cannot increase the credit limit without the express consent of the borrower.
• Data Collection: Any DLAs engaged by REs, or RE backed LSPs, are to only collect ‘need-based’ personal data. This may include name, email, income, etc. Accessing mobile phones must be avoided. Even for basic information, explicit borrower consent is mandatory. Borrowers also have an option to revoke any pervious consent provided for use of specific data. 
• Additional Fees/Charges: LSPs cannot collect any additional fees from borrowers; only REs can directly collect it. No fee that is not mentioned in the KFS can be collected.
• LSP/Third Party Interference: As the disbursal amount is now to be deposited directly into the respective bank accounts, the intervention of LSPs and third-party lenders is strictly prohibited.

 

What led to these changes?

The RBI has been monitoring the working of the digital lending world closely. The following issues may have led to their intervention:

• Digital lending apps were found to be charging exorbitantly high rate of interests, unacceptable and one-sided conditions, and a very opaque operating system. Unrestricted intervention of third parties was making the system opaque.
• Lack of regulatory pressure and a monopoly held by digital lending platforms. Essentially, these platforms were not conforming to any regulation and were reporting to no authority, whilst establishing a monopoly as borrowers preferred digital lending for its convenience/ease.
• The RBI was intent on bringing the digital lending market under the existing cohesive lending infrastructure of the economy.
• By ensuring that all loan disbursements are made into the bank account of the borrower, the RBI has ensured that it tracks the money flow through the lending chain and has visibility of the money.
• The changes are an attempt to establish audit trails, eradicate money laundering, and providing the RBI with a clear vision of money flows in each case, especially in case a dispute arises regarding a loan.
• The changes are also aimed at providing more power and transparency in the hands of the borrower. Conditions were often one-sided and purposely written in complex language.
• Usage of reprobate means including harassment, threats to life and brute force by lending apps to recover loans.

 

How do the changes benefit borrowers?

The changes may impact consumers/borrowers in the following ways:

• Compliance with a regulatory entity will ensure that fake lending apps are kept at a minimum and this will, in turn, help increase consumer confidence in the digital lending sphere.
• Greater transparency by lenders regarding the conditions of the loan, such as the KFS mechanism and a cooling-off period can help consumers make informed choices about their loans before agreeing to terms.
• Enhanced data protection of borrowers. They cannot be coerced into providing information they do not wish to share. Lenders also have to take the consent of the borrower before any change in conditions of the loan.
• Changes allow borrowers to ‘accept’, ‘deny’ or ‘revoke’ consent for any specific data collected by DLAs. Information provided can be deleted too, providing more control to borrowers over their personal data.
• Establishing a nodal grievance officer will help in managing consumer disputes and complaints more effectively, leading to a better digital ecosystem and growth in the industry. Complaints should be resolved in 30 days, post which the aggrieved may approach the RBI.

 

Conclusion

The RBI has put its foot forward in ensuring that a nuanced and detailed regulatory framework is established for the digital lending ecosystem. The hope is that these steps will help eradicate fraudulent digital lending platforms and help secure customer confidence.

The long-term impact of these guidelines will be visible within the year-end. The RBI has ensured, through these steps, that it has its keen eyes on the money involved in the digital market leading to enhanced security.