- Regulatory framework is centred on the digital lending ecosystem of the RBI’s Regulated Entities (REs) and the Lending Service Providers (LSPs)
- The framework focuses on creating transparency in the cost of lending and data privacy
- Regulation will strengthen borrowers’ trust in the digital lending ecosystem
The Reserve Bank of India has issued guidelines to regulate digital lending in order to combat the growing number of frauds and illegal activities. The universe of digital lenders is divided into three categories under the framework. Entities regulated by the RBI and authorised to conduct lending business, Entities authorised to conduct lending under other statutory/regulatory provisions but not regulated by the RBI, Entities lending outside the scope of any statutory/regulatory provisions
The Reserve Bank’s regulatory framework is centred on the digital lending ecosystem of the RBI’s Regulated Entities (REs) and the Lending Service Providers (LSPs) that they engage to provide various permissible credit facilitation services.
According to the framework, all loan disbursements and repayments must be executed only between the borrower’s and the RE’s bank accounts, with no pass-through/pool account of the LSP or any third party.
The framework focuses on creating transparency in the cost of lending by requiring lenders to communicate all costs to borrowers. The framework requires all-inclusive cost of digital loans to be disclosed to borrowers in the form of Annual Percentage Rate (APR). KFS will also include APR. Automatic credit limit increases without the borrower’s explicit consent are prohibited. REs must ensure that they, as well as the LSPs they employ, have a suitable nodal grievance redressal officer to handle FinTech/digital lending-related complaints.
Before entering into a partnership with an LSP for digital lending, REs must conduct enhanced due diligence, taking into account its technical capabilities, data privacy policies and storage systems, fairness in dealing with borrowers, and ability to comply with regulations and statutes.
Data should be collected on a need-to-know basis, with clear audit trails, and only with the borrower’s prior explicit consent. Borrowers may be given the option to accept or deny consent for the use of specific data. Borrower should also have option to revoke previously granted consent and delete data collected from borrowers
On January 13, 2021, the Reserve Bank established a Working Group on ‘digital lending, including lending through online platforms and mobile apps’ (WGDL). The WGDL’s report was posted on the RBI website, inviting stakeholders and members of the public to comment. Taking into account the feedback from a diverse set of stakeholders, the regulatory framework has been developed to support the orderly growth of credit delivery via digital lending methods while mitigating regulatory concerns.
Recently, innovative methods of designing, delivering, and servicing credit products via the Digital Lending route have gained prominence. However, certain concerns have emerged that, if not addressed, may erode borrowers’ trust in the digital lending ecosystem. Concerns primarily concern unbridled engagement of third parties, mis-selling, data privacy violations, unfair business practises, charging exorbitant interest rates, and unethical recovery practises.
Galactik Views