View | How new RBI guidelines on digital lending will help stakeholders

With steadily increasing demand, the fintech market was valued at $50 billion in 2021 and is expected to reach around $160 billion by 2025. Market surveys have further indicated that by 2030, the sector will reach $1 trillion in Assets under Management (AUM) and $200 billion in revenue.

One of the major trends in the fintech sector is digital lending, which has increased significantly in the previous two years with the market projected to be worth $350 billion by the financial year 2023 from $150 billion in the financial year 2020. However, the number of conflicts between lenders and borrowers has also increased with the passage of time due to various technical and ethical issues.

Thereby, to address the challenges on both sides of the window, the Reserve Bank of India (RBI) has recently released guidelines for digital lending, and all regulated entities (REs), including commercial banks, co-operative banks, state co-operative banks, and non-banking financial companies (NBFCs) come under the purview of RBI’s new guidelines.

RBI's recent guidelines on digital lending are not only to safeguard customers’ rights but they are aimed to establish a more fruitful financial landscape in the digital world. Apart from promoting an innovative culture of digital lending in India, the newly issued guidelines are expected to encourage digital lenders for fierce but fair market competition.

Since promoting digital lending in a safe and transparent culture is one of the core purposes of RBI while introducing the new guidelines, a borrower is conferred with the right to exit from a digital loan agreement if they pay the principal amount and the proportionate interest levied over it without any penalty during the cooling-off period. Also, there is an option of making a pre-payment for the borrower if they want to continue the loan post the look-up period.

But the most significant or favourable change as per the new guidelines is the direct disbursal of the loan amount, i.e., from the lender’s account to the beneficiary’s account, without any third-party involvement. All fintech firms and digital lending apps must also follow this rule as per the RBI. Eventually, borrowers, EMIs will now be directly credited to the lender's account.

The other imperative guidelines issued by RBI mandatorily provide a 'Key Fact Statement' or KFS to the borrower, all loans must be reported to the bureaus, Lending Service Providers (LSPs) have to charge customers fees from the regulated entity (REs) only and not directly from customers, and a special emphasis on customers’ data privacy.

Moreover, the detailed set of guidelines also entails that every lender must have to publish and share with the borrower the complete list of their lending service providers (LSPs) and Digital Lending Apps (DLAs) on their websites and mobile apps. Similarly, lenders must ensure that they have provided the borrowers with the requisite details of their authorised recovery agents. Borrowers should also be informed about changes in their details as and when applicable.

Earlier, in January 2022, the Reserve Bank of India (RBI) constituted an internal fintech department to promote digital lending and address challenges and opportunities in the sector. Now, with new guidelines on digital lending, borrowers will get better protected against financial frauds, they will show more trust in the growing fintech industry, and players will experience rapid growth based on innovative technologies and customers’ confidence.