Fintech lenders are gearing up to comply with the Reserve Bank of India's new rules on digital lending, with the deadline ending on Wednesday. While some expect disruption in the short term, and compliance costs to increase initially, fintech says they are prepared to adhere to the new regime. The guidelines focus on consumer protection against unethical recovery practices and frauds by unregulated entities amid the increasing penetration of digital loans.
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These guidelines cover areas across lending processes, disclosures, technology, and data gathering by regulated entities, their digital lending applications (DLAs), and lending service providers (LSPs) engaged by them. RBI had given regulated entities (REs) involved in digital lending until November 30 to ensure existing digital loans comply with new lending guidelines
“The industry is largely ready for the guidelines. It is important to note here that most of the fintech were already adhering to these rules. Some operation related changes had to be made for most of the industry, which is easily achievable for 90 percent of the industry. Those who were operating on an extremely different spectrum obviously had to change their business model, and shut down specific products, but that would hardly comprise of 5-10 percent of the entire industry,” Anuj Kacker, Co-founder of Freo told CNBC-TV18.
"More than 50 percent of our fintech members (non-NBFCs/Banks) were required to change their workflows due to these guidelines. But from our discussion with the membership base, no one faces any existential risk following these new rules. There will naturally be changes and some discomfort, but nothing serious." said Anurag Jain, Founding member of the Digital Lenders Association of India (DLAI) and Founder & executive director at KredX. DLAI counts the likes of Paytm, Cred, Lendingkart, Zest, Money Tap, Mobikwik, Uni, and Capital Float among its members.
"Fintechs have brought innovation and disruption through technology, and some business models like PA, P2P, etc. later became regulated, showing their significance in the overall fintech landscape. Being "unregulated" should not be looked at negatively as it does not necessarily equate to being "illegal". Just like NBFCs were needed where banks could not reach directly, fintech has been the torchbearers of some unique business models which can significantly change the way financial services operate in the future." Jain said, adding that fintech now at least has a roadmap and guidelines to abide by; there is no grey area. “We will continue to work collaboratively with other stakeholders in the ecosystem.”
“The majority of the industry was already compliant. But for those who were not and needed fundamental changes in their business model, yes, this will mean more and more consolidation is on the cards. Responsible innovation will become key to success in the coming days,” added Kacker of Freo.
New regime for digital lending
RBI first announced the digital lending rules in August this year, followed by more detailed guidelines next month in September. These guidelines prohibit third parties or lending service providers (LSPs) engaged by them from involvement in the disbursal and repayments of digital loans and forbid them from saving any personal information of borrowers, except primary data for operations. It specifies that any data collected by digital lending apps (DLAs) should be need-based only and done with the prior explicit consent of borrowers.
The new rules also prevent any automatic increase in credit limits by lenders without the borrower's explicit consent and allow for a cooling-off period of a minimum of three days for loans having a tenor of seven days or more and one day for loans having a tenor of fewer than seven days. During this time, borrowers can exit digital loans by repayment without penalty.
It also states that any fees or charges payable to LSPs engaged by regulated entities must be directly paid by these regulated entities and not by the borrowers.
RBI has also directed REs to disclose the overall annual charges in a clear format to borrowers when taking loans and to publish a list of DLAs prominently and LSPs engaged by them on their website. Hence, customers are aware of these aspects.
Disruption in the industry
Soon after RBI announced the new rules in August, fintech startup Uni, which offers buy-now-pay-later solutions, temporarily suspended its card services to its existing users. As of November 30, Slice card on credit was also stopped. Both players would earlier disburse loans via prepaid cards to their customers and had to change their business model to pay loans directly into customers' bank accounts later.
Earlier in June, RBI had separately released a notification explicitly barring prepaid payment instruments (PPIs) from being loaded via credit lines in the run-up to digital lending guidelines being firmed up.
"The guidelines did create a lot of disruption for some companies; they were required to go back to the drawing board. But in the startup world, we say it's not over till it's over. And so we continue to innovate," said Jain of DLAI.
“As a fintech company we hope for more clarity on the FLDG stance and while it may lead to a few months of disruption in terms of changing business model, the overall industry may not have a massive impact. As a Lending Service Provider (LSP), we comply with all the guidelines and have made changes to our disbursal and repayment processes,” Anubhav Jain, Co-founder and CEO, Rupifi told CNBC-TV18.
November 30 Deadline
"All seem set to adhere (to the RBI guidelines) by our members," said Sugandh Saxena, the CEO of the Fintech Association for Consumer Empowerment (FACE), to CNBC-TV18. "Systems, including technology stacks, are ready to comply with regulations. After all, regulatory expectations from digital lending, which are fairly straightforward, have been in public space long enough, and lenders have made all necessary changes," she said.
"While the guidelines did change a few workflows for digital lending companies, it has provided guard rails for the industry and will benefit the entire ecosystem in the long term. Most companies have adjusted to the new "normal" and will abide by them in letter and spirit," added Anuraj Jain.
Saxena does not see any significant disruptions from the new guidelines for the industry. "It goes without saying that our members have worked flat out to honour the regulations in the last few months. In fairness, it is the first time we have such rules, and hence some interpretational issues are bound to arise. Wherever the industry needs clarity, it references the regulator and will be guided by the regulator."
"As it knits together the customer protection and partnerships framework between REs and LSPs, DLG (digital lending guidelines) significantly boosts the market confidence, be it customers, lenders and other ecosystem players. DLG will create a trustworthy digital lending ecosystem for customers as customers can expect and get uniform and consistent experience and safeguards as they access loans, notwithstanding the diversity in partnerships at the back end of digital lending apps (DLAs)," Saxena added.
“RBI, in the last two years, has created regulations with consumer protection and transparency at its core. This has provided space for the financial services sector to reimagine the way lending and borrowing can be done…We are hoping to witness a smoother transition into the future of digital lending with utmost ease and confidence," said Rahul Kothari, Chief Business Officer, Razorpay.
(Edited by : Sangam Singh)
First Published: Nov 30, 2022 2:04 PM IST
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