A regulatory framework to support orderly growth of credit delivery through digital lending methods while mitigating the regulatory concerns has been firmed up. This regulatory framework is based on the principle that lending business can be carried out only by entities that are either regulated by the RBI.
The Reserve Bank of India on Wednesday released guidelines for digital lending based on the recommendations of the Working Group on Digital Lending (WGDL).
To curb the illegitimate digital lending activity being carried out by entities that are lending outside the purview of any statutory/regulatory provisions, the Reserve Bank of India had constituted the Working Group on ‘digital lending including lending through online platforms and mobile apps’ on January 13, 2021.
The universe of digital lenders has been classified into three groups:
Entities regulated by the RBI and permitted to carry out lending business
Entities authorised to carry out a lending as per other statutory/regulatory provisions but not regulated by RBI
Entities lending outside the purview of any statutory/ regulatory provisions
With the coming of innovation in the financial system, certain concerns have also emerged that, if not mitigated, may erode the confidence of members of the public in the digital lending ecosystem. The concerns primarily relate to the unbridled engagement of third parties, mis-selling, breach of data privacy, unfair business conduct, charging of exorbitant interest rates, and unethical recovery practices.
In the backdrop of the above, the RBI has examined the recommendations made by the WGDL. Certain highlights of the requirements being mandated to be followed by RBI’s Regulated Entities (REs), their Lending Service Providers (LSPs), Digital Lending Apps (DLAs) of REs, DLAs of LSPs engaged by REs, are as follows:
-The REs will need to ensure that activities such as all loan servicing, repayment, etc are executed directly in the borrower’s bank account without any pass-through account/pool account of any third party. Same would be the case for disbursals.
-Exceptions would be considered for disbursals covered exclusively under statutory or regulatory mandate, the flow of money between REs for co-lending transactions, and disbursals where loans are mandated for specified end-use as per regulatory guidelines of RBI or of any other regulator.
-The REs are to ensure that any fees, etc. payable to LSPs are paid directly by the REs and are not charged by the LSP to the borrower directly.
-The REs shall ensure that they and the LSPs engaged by them shall have a suitable nodal grievance redressal officer to deal with fintech/digital lending-related complaints. Such grievance redressal officers shall also deal with complaints against their respective DLAs.
-The details of the grievance redressal officer shall be indicated on the RE's website, its LSPs and on DLAs, as applicable. As per extant RBI guidelines, if any complaint lodged by the borrower is not resolved by the RE within 30 days, then they can lodge a complaint.
-The REs are also to provide a Key Fact Statement (KFS) to the borrower before the execution of a contract in a standardised format. Fees, charges, etc not mentioned in KFS cannot be charged by REs to the borrower at any stage.
The recommendation pertaining to First Loss Default Guarantee (FLDG) is under examination by the Reserve Bank.A Self-Regulatory Organisation (“SRO”) covering REs and DLAs/LSPs in the digital lending ecosystem is also to be set up.