The Reserve Bank of India issued the digital lending guidelines in September 2022 which brought in a significant disruption in the fintech industry. While the guidelines cover and talk about various operational, disclosure and technological matters, there is an equally important yet lesser talked about aspect — the fair practice requirements and customer grievance redressal. Understanding these requirements by the last mile person in the field dealing with the customers is very critical to ensure its adherence in letter and spirit.
One more important reason why these aspects are critical is because, at the end, it all started when a few customer complaints were raised with the RBI and other authorities pertaining to serious violations of the fair lending practice requirements and breach of data privacy by unauthorised and illegal lending apps. Due to this, a working group was constituted by the RBI in January 2021 to study all aspects of digital lending activities in the regulated and unregulated space which submitted its recommendations in November 2021 and by virtue of which the digital lending guidelines came into the picture.
Now, as far as digital lending guidelines are concerned, it strictly requires regulated entities to ensure a few fair practices and disclosure requirements.
Firstly, as expected, the guidelines landed tough on the data privacy aspects. There were multiple instances where the lending apps obtained unnecessitated access and permissions, sharing sensitive information about the borrowers to unauthorised third parties, etc. The guidelines clearly require the lenders to ensure that a) access of mobile phone, location, media etc. shall be obtained only for the purpose of KYC limited as a one-time access only, and b) specific and revocable consents should be obtained for sharing such information with any third party. Further, unregulated entities storing customer information have inherent data privacy risks. Hence the guidelines require the purging of the data so collected by unregulated lending apps/service providers.
Next, the regulatory stance on digital lending always required issuing sanction letters on the lender’s letterhead. It is critical for the borrower to know who the lender is ultimately. There were instances where borrowers availed loans from unauthorised lending apps without knowing the details of the end lending institution. This affects the customers’ right to grievance redressal under the RBI’s grievance redressal machinery since the customer is unaware of the lending institution and the unregulated lending apps don’t fall within the regulation of the RBI. Disclosing the lender’s name at the time of application itself is very important for the customer to take informed decisions and rely upon the regulatory rights available to them.
Then, the guidelines also require issuing a standardised Key Fact statement, which shall include details of the annual percentage rate of interest charged to the borrower, recovery mechanism, grievance redressal officer details, etc. This not only helps the customer in understanding the standard charges applicable for his loan and acts as a ready reference but also aids the customer in doing a head-to-head comparison of the commercial terms under other sanctions that he may have in hand so that he is not misguided and can take an informed decision.
It also requires that no charges other than those disclosed in the KFS are charged to the customer and no separate fee should be charged to the borrower by the sourcing agents. Again, this is critical from a fair disclosure point of view, in light of the various hidden charges that are often levied by digital lending apps.
Furthermore, all the lenders and service providers engaged in digital lending are required to make adequate disclosure on their website and digital app with respect to their arrangements for offering digital loans, product details, grievance redressal mechanism, details of recovery agents, etc. These additional disclosures are expected to further aid the borrowers in understanding the credit product that they are availing and to protect their interest throughout the currency of the loans.
Lastly, it is very important to note that the RBI’s stance on these aspects is technologically neutral and all the requirements in the digital lending guidelines are in addition to the existing requirements under the fair practices code.
Views expressed By Sunil Lotke, Chief Legal and Compliance Officer, U GRO Capital
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