Borrower’s Protection, Transparency & Accountability: RBI Guidelines on Digital Lending

Priyank Kothari, Director, Arvog (1)

Reserve Bank of India has released a detailed set of guidelines for digital lending. The Reserve Bank’s regulatory framework is focused on the digital lending ecosystem for RBI’s Regulated Entities (REs) and the Lending Service Providers (LSPs) engaged by them to extend various permissible credit facilitation services. Announced for immediate implementation on 10th August 2022; the directives were the need of the hour. In my previous blog summarizing the status of Indian FinTech Funding, I mentioned the release of these guidelines. We at Arvog, support the guidelines that will bring in greater transparency & disclosure in the lending process, instilling consumer trust that eventually grows the lending business and expands the market.

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These measures will curb malpractices of the ecosystem and market concerning aggressive selling, misrepresentation, borrowers not knowing which apps they were getting on-boarded on, and a lot of identification concerning Aadhaar cards and PAN cards being used that were not authenticated. All such wrongdoings were leading to financial delinquencies and thus the regulator needed to step in and realign the processes and the system. I appreciate RBI’s intervention in realigning the entire process including authentication bringing accountability. By implementing disclosers by a lender to the loan applicant, these guidelines will certainly protect the consumer as they will be completely informed as to what kind of arrangement they will be getting in with the borrowers. Plus, with this regulation, they have tried to keep the regulated entities in focus wherein they will be accountable for any malpractices.

The new regulations will bring a lot of uniformity to the market. And due to this, FinTechs – the Lending Service Providers (LSP) will have to completely change the ways they were working for the business of lending. The new guidelines are a boon to us (NBFCs) as we always wanted to keep complete transparency in the lending process. Rightfully, we always encouraged borrowers’ protection including their personal and other data privacy as many digital lenders / LSPs were accessing their personal data and misusing it for recollections. Unscrupulous and aggressive tactics for collection and recovery were anyways not allowed but the guidelines further reinstate the same protecting the loan applicant.

Here are the key takeaways from the RBI’s digital lending guidelines:

1. Total and Complete Disclosure: The loan applicant must be completely aware of the entire lending process and the exact terms of the same.

2. Role of Regulated Entities (RE): The REs will have more control over FinTechs and the entire process. FinTechs have to rely on these REs (Bank and NBFCs) which is eventually good to protect borrowers’ rights and have complete transparency as per the latest guidelines released.

a) The all-inclusive cost of digital loans in the form of an annual percentage rate (APR) is required to be disclosed to the borrower by REs. Also, REs have to provide a key fact statement (KFS) to the borrower before the execution of the contract in a standardized format for all digital lending products. And an automatic increase in credit limit without the explicit consent of the borrower is prohibited.

b) REs must conduct an enhanced due diligence process before entering a partnership with a Lending Service Provider (LSP) for digital lending, taking into account its technical abilities, data privacy policies, and storage systems, among other things.

c) REs is required to ensure that any lending done through a Digital Lending App (DLAs) must be reported to Credit Information Companies (CICs), irrespective of its nature or tenor. Lending through the Buy Now Pay Later (BNPL) mode also needs to be reported to CICs.

3. Stringent Processes: FinTechs which were not following the processes and procedures will be facing a lot of challenges as and when they initiate the transition to the new guidelines. Also, another setback will be that the FinTechs now have to rely on REs and work as per their requirements and stringent cultures.

I hope these Digital Lending guidelines create a positive impact by Protecting the Borrowers and bringing Transparency and Accountability to the system. The next awaited guidelines from the RBI are for the First-Loss Default Guarantee (FLDG). It will also be a crucial aspect when it comes to lending FinTechs.

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