Explained: What are RBI's new norms for digital lending in India?

Digital lending involves giving and recovering loans through web platforms or mobile apps. Here are the new regulations and why they have been introduced

The Reserve Bank of India (RBI) has instituted a framework to regulate digital lending. Its new regulations are based on recommendations from a working group set up in January 2021 on ‘Digital lending including lending through online platforms and mobile apps’ (WGDL). What are the new regulations and why have they been introduced?

Who are digital lenders?

RBI has categorised digital lenders into three groups:

• Entities which are regulated by the RBI and are allowed to carry out lending business.
• Entities that are authorized to carry out lending as per other statutory or regulatory provisions but are not regulated by the RBI.
• Entities lending outside the purview of any statutory or regulatory provisions.

India’s digital lending

Digital lending involves giving and recovering loans through web platforms or mobile apps. It facilitates speedy disbursal and helps lower costs.

Lending Service Providers (LSPs) operate in collaboration with Non-Banking Financial Companies (NBFCs) who disburse credit to customers using the former’s platform. However, these platforms often resort to reckless practices by lending beyond a borrower’s repayment capacity.

What are the new guidelines?

Some highlights of the new guidelines are:

• All loan disbursals and repayments are to be executed between the bank accounts of the borrower and the entity. This eliminates the presence of a nodal pass-through or pool account of the LSP.
• Lenders must inform the borrower about all the fees, charges, and the annual percentage rate (APR) in a standardised format.
• Charges payable to LSPs in the credit intermediation process will be paid directly by the bank and not the borrower.
• No automatic increase in credit limit can be made without the explicit consent of the borrower.
• Data collected by digital lending apps must be need-based, with the borrower’s prior consent, and can be audited if required.
• Banks and the LSPs associated with them must appoint a nodal grievance redressal officer to deal with fintech- or digital lending-related complaints.
• The borrower can complain to the Integrated Ombudsman Scheme of the RBI if their grievance is not resolved by the bank within 30 days.
• Regulated Entities are required to ensure that any lending carried out through digital lending apps has to be reported to Credit Information Companies (CICs).
• Lending through the Buy Now Pay Later (BNPL) mode also needs to be reported to the CICs.

What is the need for these guidelines?
 

The RBI has mandated these regulations in order to check mis-selling to customers, unethical business conduct, exorbitant interest rates, and excessive engagement of third parties in digital lending transactions.