RBI guidelines may lead to high compliance cost for digital lending apps

Industry associations are likely to approach the RBI to weed out any interpretational ambiguity

The fintech universe is looking positively at the digital lending framework brought in by the Reserve Bank of India (RBI) because the strict norms are likely to address the problem of illegal entities lending to economically weak people.

However, industry players say adherence to the framework is likely to drive up their compliance cost and increase the operational complexities of their business models, resulting in a brief period of growth slowdown in this space.

The industry associations — the Fintech Association for Consumer Empowerment (FACE) and Digital Lenders Association of India (DLAI) — are likely to approach the RBI to weed out any interpretational ambiguity.

On the issues on which the central bank has said there is a need for further examination such as setting up self-regulatory organisations (SROs) covering digital lending apps (DLAs) and lending service providers (LSPs), the industry associations will continue their dialogue with regulator.

“… While it is not possible to quantify the exact impact (of the cost), there could be some slowdown as fintech firms try to implement some of the guidelines…,” said Suresh Ganapathy and Param Subramanian of Macquarie Research in their report.

Lizzie Chapman, chief executive officer and co-founder, ZestMoney, and president, DLAI, said: “The guidelines make it clear that India will not be a market where regulatory loopholes can be exploited to build business.”

The RBI has proposed all loan disbursements and repayments will be done only through the bank accounts of the borrower and the regulated entity (RE), without any pass-through/pool account of the LSP or any third party. REs have to ensure that fees for LSPs are paid directly by them (REs).

The RBI has proposed REs have to tell the borrower what the all-inclusive cost of digital loans in the form of the annual percentage rate (APR) is. There cannot be an automatic increase in credit limits without the borrower’s consent.

“From an industry perspective, it is net positive because the RBI has laid down guidelines on how the stakeholders in the ecosystem work within the guardrails and ensured that innovation is not stifled,” said Anuj Kacker, co-founder, Freo, and vice-president, DLAI, told Business Standard.

“Money movement can happen only through bank accounts. This is followed by the majority of the players. However, there might be some who are not doing that. A lot of what the RBI has come up with is a reiteration of what exists. It has provided greater clarity and ensured stricter enforcement,” Kacker said.

Sugandh Saxena, CEO, FACE, told Business Standard: “The SRO framework needs careful consideration. We have SROs in only one segment, i.e. non-banking financial companies/microfinance institutions, which is very distinct with a different history and evolution … We are examining the regulations and wherever there is a need for clarification, we will approach the RBI.”

In a notification to fintech players a couple of months ago, the RBI had prohibited loading prepaid payment instruments (PPIs) from credit lines. Through this framework, it has clarified that loan disbursements can be made only to a borrower’s bank account, not into a PPI. In the working group recommendations, there is a line saying a loan can be disbursed through fully KYC PPIs, but the final guidelines have made it amply clear what is permissible.

Enhancing customer data protection, the central bank mandated that DLAs should not access mobile phone resources, such as files and media, contact list, call logs, and telephony functions. However, one-time access can be taken to cameras, microphones, location, or any other facility necessary for on-boarding/KYC requirements only with the consent of the borrower.

 Further, these apps must provide an option to borrowers to accept or deny consent for the use of specific data, including the option to revoke previously granted consent, besides the option to delete the data collected from borrowers by DLAs/LSPs.

“All these changes mean doing business for NBFCs with fintech firms will become difficult,” said Ajay Chaurasia, vice-president, RupeeRedee.

Sashank Rishyasringa, co-founder and MD, axio (formerly Capital Float), said the guidelines had provided enhanced transparency for customers.

“As an RBI-registered NBFC, we welcome these guidelines because they encourage innovation while being compliant and protecting the interests of the end consumer.”