The Reserve Bank of India established to retain credit transactions across the country constituted a ‘Working group on digital lending’ as on January 13, 2021 for the purpose of putting together recommendations on digital lending through a press release .
In reference to para 7 of recommendations of the Working group on Digital Lending issued on August 10, 2022 , recognizing lending through digital platforms like mobile apps and online portals a follow up notification has been issued by RBI with immediate effect i.e. from September 02, 2022 by the Reserve Bank of India .
The Guidelines (issued under section 21, 35A, 56 of the Banking Regulation Act, 1949, sections 45JA, 45L and 45M of the Reserve Bank of India Act, 1934, sections 30A and 32 of the National Housing Bank Act, 1987, section 6 of the Factoring Regulation Act, 2011 and section 11 of the Credit Information Companies (Regulation) Act, 2005) shall include ‘existing customers availing fresh loans’ as well as ‘new customers getting on boarded’. However, a further extension has been provided for Regulated Entities till November 30, 2022 for keeping in pace with the execution of these guidelines.
RBI’s Guidelines on Digital Lending- Highlights
1. Scope of Application:
• All Commercial Banks, Primary (Urban) Co-operative Banks, State Co-operative Banks, District Central Co-operative Banks, Non- Banking Financial Companies (including Housing Finance Companies).
2. Loan disbursal, servicing and repayment:
• It is the duty of Regulated Entities (to be referred as RE from here onwards) to check for any third party intervention regarding any disbursement on accounts of the borrower.
3. Collection of fees, charges, etc.:
• Any fees paid to Lender Service Provider (to be referred as LSPs from here onwards) are to be settled directly by the REs.
• Interest for penalty shall be calculated on the outstanding loan amount with interest rates to be charged on an annualized basis in the Key Fact Statement.
4. Disclosure to borrowers:
• APR: to be disclosed in the Key Fact Statement (to be referred as KFS herein onwards).
REs shall provide a KFS to the borrower in the format as prescribed by the RBI.
The KFS must include the details of APR, recovery mechanism, details of grievance redressal officers.
Fees, charges to be charged from the borrower has to be strictly mentioned in the KFS without fault.
• All the documents attached on the website to be duly signed digitally.
• Publishing the list of LSPs by their respective REs on the main website.
• Prominent information regarding the products to be displayed to spread awareness.
• REs shall convey to their borrowers details regarding recovering agents.
• REs shall ensure working links on the respective portals to avoid speculations.
5. Assessing the borrower’s creditworthiness:
• Economic profile of the borrowers prior to any extension be assessed for audit purposes.
• It is the responsibility of REs to keep in check the increase in credit limit except for situations when prior consent of the borrower has been taken for such elevation.
6. Cooling off/ lock-up period:
• An option for cooling off period to be issued in favor of borrower to exit digital loan without any penalty. The period for look up shall be determined by the Board of the RE.
7. Due diligence and other requirements with respect to LSPs:
• Due diligence on part of REs to be ensured before entering into new agreements with third parties.
• A periodic review by REs to check the conduct of LSPs associated by them.
• Significant guidance to be imparted by the REs to acting agents in matters of smooth discharge of its duties.
8. Collection, usage and sharing of data with third parties:
• A consent has to be taken by the REs before collecting any information through DLAs.
• Purpose for obtaining consent of the borrower has to be disclosed on priority.
• Further consent to be taken in case the data of the borrower has to be shared with third party.
9. Storage of data:
• No storage of personal information except for the basic minimal data of the customers.
• Assurance for collection of consumer data including the type of data, data destruction protocol, standards for handling security breach etc. to be shown on the website and applications by DLAs of REs and LSPs.
• No biometric data to be stored or collected unless clearly mentioned in the statutory guidelines.
• Ensuring proper data collection on the servers located within India in compliance with the statutory/ regulatory provisions.
11. Technology Standards:
• In order to undertake digital lending, REs must ensure that proper adherence to guidelines issued on cyber security by the RBI has to be followed.
12. Role of Credit Information Companies:
• Timely reporting of lending transactions done by DLA &/or DLA’s of LSP’S to the CICs.
• Outsourcing guidelines issued by RBI on account of the extension of structured digital lending products to be reported to CICs by the REs.
13. Loss sharing arrangement in case of default:
• The provision for compensating a certain percentage of default in a loan portfolio of the RE as disclosed in the Master Directions issued by RBI .
In compliance with the set of recommendations put forward on August 10, 2022; the above guidelines bring an in depth analysis of matters concerning creditworthiness, key fact statement, collection of fees, charges etc. and regulatory framework of Credit Information Companies. These guidelines aim at eliminating unethical business conduct, exorbitant interest rates and excessive engagement of third-party interventions.
A system that entirely acknowledge digital lending will promote accountability and transparency for its transactions curbing illegitimate affairs recurring in our accounts.
Concerns are also rising that implementation of these guidelines will severely impact giant e-commerce players in a way that could hamper their ‘buy now pay later schemes’.
Also, in a market dwelling around the protection of its consumers, these new guidelines are also in consonance with the aforementioned ground principle, thereby safeguarding the interests of end users. However, a stronger and more preferable point of view can be derived in the wake of execution and contemplative implementation.