The Reserve Bank of India (RBI) has recently issued the first set of guidelines to regulate digital lending activities and tackle illegal practices among some players in the industry. The development came after various concerns were raised regarding digital lending, leading to the creation of a Working Group on ‘digital lending including lending through online platforms and mobile apps’ (WGDL) by the RBI in January 2021. Some of the stricter norms proposed by the working group have been accepted and included in the new guidelines.
Understanding Digital Lending
Digital lending refers to the process of providing loans via web platforms or mobile applications by utilizing technology for authentication and credit assessment. Several banks have started their own independent digital lending platforms to leverage their existing capabilities in traditional lending and meet the growing market demand.
Digital lending promotes financial inclusion by enabling access to credit to under-served segments such as microenterprises and low-income consumers in India. It also simplifies borrowing processes and helps reduce informal borrowing. Additionally, digital lending reduces the time taken to process loan applications and can decrease overhead costs by up to 30-50%.
Highlights of the New Digital Lending Guidelines
The new guidelines cover several areas of digital lending:
– Loan Disbursals and Repayments: All transactions should occur only between the accounts of the borrower and the Regulated Entities (RE) without involving any third-party accounts.
– Payments: Fees or charges payable to Lending Service Providers (LSPs) will be paid directly by the Regulated Entities and not by the borrowers.
– Loan Disclosure: Digital lenders are required to disclose all-inclusive costs of digital loans in the form of Annual Percentage Rate (APR) to the borrowers.
– Increase in Credit Limit: Explicit consent of the borrower is needed for any increase in credit limit.
– Exiting Digital Loans: Borrowers can exit digital loans without any penalty during a cooling-off period.
– Data Privacy: Data collected by digital lending apps need to be based on customer consent and should be auditable.
– Grievance Redressal: A nodal grievance redressal officer must be assigned to handle complaints related to digital lending.
Scope of the New RBI Guidelines
RBI’s new guidelines categorize digital lenders into three types, with only the first group falling under its purview:
1. Entities regulated by the RBI and permitted to conduct lending business.
2. Entities permitted to lend under other statutory or regulatory provisions but not regulated by the RBI.
3. Entities lending outside the purview of any statutory or regulatory provisions.
The focus of RBI’s regulatory framework revolves primarily around the digital lending ecosystem of regulated entities and the LSPs they engage.
The Need for Digital Lending Guidelines
Technological innovation has led to exponential growth in the digital lending ecosystem, allowing several fintech firms to provide credit services. However, this progress has been marred by issues such as mis-selling to unsuspecting customers, unethical business practices by some digital lenders, excessive involvement of third parties, and privacy concerns.
The Way Forward
India is experiencing a digital lending revolution, and it’s crucial for these services to be provided responsibly. Digital lenders should commit to a code of conduct that respects principles of integrity, transparency, and consumer protection. They should also establish clear standards for disclosure and grievance redressal. Besides technological safeguards, efforts should be made to educate and create awareness about digital lending amongst customers.
