Recently, the Reserve Bank of India announced fresh rules and regulations surrounding digital lending to check for frauds and malpractices. The announcement is seen as an outcome of rampant cheating and fraud cases being reported in the sector.
Here’s a detailed look at RBI’s new digital lending norms. Let’s begin by understanding why these rules are required.
Purpose of RBI’s digital lending rules
RBI announced the new digital lending rules primarily to manage the entire ecosystem. The new rules have been formulated as per the recommendations received from a working group set up for digital lending. Here are some of the challenges or problems faced by the digital lending sector that were highlighted by the working group:
- Very high interest rates are being charged to borrowers
- Third parties being engaged in an unrestricted manner
- Customer data privacy breaches
- Unfair business practices including mis-selling of lending products
- Recovery modes being adopted are unethical
Summary of RBI’s new digital lending rules
Some of the highlights of the new digital lending rules that were introduced by RBI are:
- Direct disbursals and payments: RBI has now made it mandatory for all digital lending companies to disburse and manage loan repayments directly between the borrower’s bank accounts and the Regulated Entity (RE). This does away with any intermediary payment via pool accounts, third parties, or Lending Service Providers (LSPs).
- Provide KFS to borrowers: All digital lending companies will have to provide borrowers will with a KFS or Key Fact Statement before the loan contract is executed.
- Disclose APR: Lenders will have to disclose the APR or Annual Percentage Rate to all borrowers. This should be inclusive of all costs including fees on digital loans.
- RE to pay LSP Fee: RBI has mandated REs or Regulated Entities to pay any fee or charges to Lending Service Providers (LSP) as part of the credit intermediation process. This should not be passed on to borrowers.
- Credit limit cannot be auto-increased: REs will not be permitted to automatically increase the credit limit of any borrower without explicitly getting consent from them.
- Cooling-off period: Digital lenders will now have to provide a cooling-off period to allow borrowers the option to repay the principal amount and corresponding APR without attracting a penalty. The loan contract must clearly state this cooling-off period.
- Contact for grievance redressal: All REs and LSPs must mandatorily appoint a grievance redressal officer to handle customer complaints related to digital lending products and services.
- Consent for data collection: Any data collection done by lending institutions must be need-based only. It should also have prior explicit consent from the borrower and audit trails.
- Complaint resolution: REs must follow a timeline of 30 days or adopt a stipulated timeframe for the resolution of complaints filed by customers. A borrower can register a complaint against the RE in case of no resolution within the time frame.
- Reporting to CICs: REs must report any lending done by Digital Lending Apps (DLAs) to Credit Information Companies (CICs) to reflect changes in credit scores.
Digital lender categories
As per RBI’s new digital lending norms, digital lenders will be categorised into these areas:
- RBI-regulated and permitted lending entities
- Lending entities not directly regulated by RBI but permitted to offer lending facility as per regulatory provisions
- Lending entities not part of the regulatory framework or provisions
The new rules introduced by the RBI will cover only the type 1 lending entities. Type 2 lenders to have their own regulators for the management of rules on digital loans. Type 3 lenders to fall under government purview requiring the introduction of a new law to regulate them.
With the introduction of these digital lending rules, the Reserve Bank of India has tried to make digital lending safe for borrowers in the country. Borrowers will benefit from these guidelines as rampant malpractices and frauds will slowly come down in the digital lending ecosystem.
Digital lending involves quick online loan disbursal in an effective and convenient manner as compared to the traditional method. The digital ecosystem involves the usage of enhanced automation and blockchain that allows lending institutions to use automated processes for loan approvals and disbursals.
Some of the benefits of digital lending include easier loan access for borrowers, quick disbursal, minimal documentation, and easy access to credit for first-time borrowers.
Until now digital lending was relatively costlier in India due to the absence of regulations or cap on interest rates. However, since the RBI has now introduced regulations on digital lending, these may become slightly affordable with rate caps.
Yes, digital lending is legal in India. Depending on the type of entity offering lending services, these will either come under RBI governance or government laws.