The Reserve Bank of India (RBI) said in its long-awaited rules for the segment, announced on Wednesday, that all digital loans must be given and repaid through bank accounts of regulated firms only, with no pass-through of loan service providers (LSPs) or any third parties.
The rules, which aim to reduce escalating malpractices in the digital lending ecosystem, are based on the suggestions of a digital lending working group, the report of which was made public in November 2021. “The issues principally pertain to unfettered participation of third parties, mis-selling, data privacy violations, unfair business practises, charging excessive interest rates, and unethical recovery tactics,” the RBI stated in the final recommendations.
The RBI divided digital lenders into three categories: entities regulated by the RBI and permitted to conduct lending business, entities authorised to conduct lending under other statutory or regulatory provisions but not regulated by the RBI, and entities lending outside the purview of any statutory or regulatory provisions. The most recent regulatory framework focuses on the digital lending ecosystem of the RBI’s regulated enterprises (REs) and the LSPs they contract to provide credit facilitation services.
The RBI stated that for firms in the second category, the appropriate regulator may consider developing digital lending guidelines based on the suggestions of the working group.
Apart from direct disbursals and repayments of digital loans, the norms mandate that any fees or charges payable to LSPs in the credit intermediation process shall be paid directly by the RE and not by the borrower.
According to the Digital Lenders’ Association of India (DLAI), the rules are a sophisticated framework that would assist the digital lending ecosystem expand responsibly and sustainably. “At the same time, the RBI has clearly addressed the need to stamp out incipient trends that are antithetical to best practises related to customer protection and data security,” DLAI said in a statement. “We also look forward to engaging with the RBI in the coming months as the industry moves towards forming an SRO (self regulatory organisation) to promote adherence to these recommendations.”
Before completing the loan contract, the borrower must be furnished with a standardised key fact statement (KFS). Borrowers must be informed of the total cost of digital loans in the form of an annual percentage rate (APR). The APR must also be included in the KFS. Automatic credit limit hikes without debtors’ explicit authorization have been forbidden.
“Specifically, the Key Facts Statements (KFS) and explicit consent measures introduced today should ensure required transparency and inspire trust in the system. The clarity on the disbursal of transferring money to the customer’s bank account directly was much needed,” said Ranvir Singh, founder and managing director.