RBI Issues Stringent Norms For Digital Lending Space
In its much expected instructions for the market, the Reserve Bank of India (RBI) stated that all digital loans must be dispensed and repaid through bank accounts of regulated firms alone, without pass-through of loan service providers (LSPs) or any third parties.
The suggestions of a working group for digital lending, whose report was made public in November 2021, served as the basis for the rules, which are intended to reduce the growing number of malpractices in the ecosystem for digital lending. The RBI stated in the final guidelines that the main issues were "unrestrained engagement of third parties,mis-selling, breach of data privacy, unfair business behavior, charging of exorbitant interest rates, and unethical recovery techniques."
The central bank divided digital lenders into three groups: those under RBI regulation and authorized to conduct lending business, those authorized to do so under other statutory or regulatory provisions but not under RBI regulation, and those conducting lending outside the ambit of any such statutory or regulatory provisions. The most recent regulatory framework is concentrated on the digital lending ecosystem of the regulated organization (REs) of the RBI and the LSPs they employ to provide credit facilitation services.
The standards also require that any fees or costs due to LSPs during the credit intermediation process be paid directly by the RE and not the borrower. This is in addition to direct loan disbursal and repayments.
The recommendations, according to the Digital Lenders' Association of India (DLAI), are a nuanced roadmap that would aid in the prudent and sustainable expansion of the digital lending ecosystem. We also look forward to engaging with the RBI in the coming months as the industry moves toward forming an SRO (self regulatory organization) to promote adherence to these recommendations, the DLAI said in a statement. "At the same time, the RBI has clearly addressed the need to stamp out incipient trends that are antithetical to the best practices related to customer protection and data security," it added.
The laws, according to Ranvir Singh, founder and managing director of Ring, which manages the loan platform Kissht, provide clarification on the RBI's position. “Specifically, the Key Facts Statements (KFS) and explicit consent measures introduced today should ensure required transparency and inspire trust in the system. The clarity on the disbursal of transferring money to the customer’s bank account directly was much needed,” Singh said.
According to current RBI regulations, if a borrower's issue is not resolved by the RE within the allotted 30-day timeframe, they may file a complaint with the integrated ombudsman programme of the central bank.