Consistent with its customer-protection orientation, and its hawkish stance towards the fintech sector, the Reserve Bank of India (RBI) set up a working group in January 2021 to evaluate “digital lending including lending through online platforms and mobile apps”. The group’s report was posted on the RBI’s website for comments in November 2021, followed by a not uncommon period of silence. On 10 August 2022, the RBI issued a press release (PR) highlighting that while it is keen to foster innovation in the financial system, it has concerns over some aspects of digital lending, and would seek to regulate it to “support orderly growth of credit delivery through digital lending methods while mitigating the regulatory concerns”. The PR set out recommendations that had been accepted for immediate implementation and this was followed on 2 September 2022 by the RBI’s digital lending guidelines.
The digital lending guidelines apply to all commercial banks and non-banking financial companies, including housing finance companies, together referred to as regulated entities (RE). The guidelines achieve notable firsts for regulation. They define digital lending as “a remote and automated lending process, largely by use of seamless digital technologies for customer acquisition, credit assessment, loan approval, disbursement, recovery, and associated customer service”, and digital lending apps and platforms (DLA) as “mobile and web-based applications with user interface that facilitate digital lending services”. The guidelines define a lending service provider (LSP) as an agent of an RE that carries out or assists an RE in “customer acquisition, underwriting support, pricing support, servicing, monitoring, recovery of specific loan or loan portfolio”.
REs must provide borrowers with a key fact statement before the execution of any loan contract. The guidelines prescribe the format of this statement and require the disclosure of an “all-inclusive cost and margin”, including the cost of funds, processing fees, penal charges and late payment charges, expressed as an effective annualised rate. Among other loan-related details, this statement must include details of the recovery mechanism, of the grievance redressal officer dealing with digital lending, and of the cooling-off or look-up period (defined in the guidelines as a window allowing borrowers to exit a digital loan). Any fees or charges not mentioned in the key fact statement cannot be charged to a borrower.
To prevent borrower-unfriendly practices, the guidelines prescribe that any fees or charges of an LSP are paid directly by an RE and not by the borrower. An RE is required to assess the creditworthiness of a borrower by recording their economic profile based on factors such as age, income, and occupation prior to providing any loan either through a digital lending app or an LSP. Further, no automatic increase in a credit limit can be given to a borrower without their explicit consent to each such increase.
In view of the RBI’s mandate to regulate entities licensed by it, the guidelines do not apply to pure technology companies that may also be involved in digital lending. Instead, the digital lending guidelines indirectly seek to ensure that consumer interests are protected when such companies partner with RBI-regulated entities. For instance, an RE is now required to conduct enhanced due diligence before entering into a partnership with an LSP for digital lending “taking into account its technical abilities, data privacy policies and storage systems, fairness in conduct with borrowers and ability to comply with regulations and statutes”.
The guidelines are well-intentioned and aim to create a level playing field for digital lending as well as an ecosystem that protects customers. However, it is doubtful whether these guidelines were needed at all. A more stringent implementation of the RBI’s existing directions on corporate governance and outsourcing would have a similar effect. In creating the new regulation, the RBI increases the chances of regulatory inconsistency and arbitrage. For example, credit card marketing and telemarketing by banks do not seem to be covered by the guidelines. It is hoped that the RBI does not tilt the balance in favour of conventional banks and will follow up these guidelines with similar measures for other parts of the financial sector.
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