RBI’s Modified Digital Lending Norms comes into Effect

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    • The modified guidelines on digital lending by the Reserve Bank of India (RBI) have come into effect from 1st December, 2022.
      • Its new regulations are based on recommendations from a working group set up in 2021 on Digital lending including lending through online platforms and mobile apps (WGDL).

    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 authorised 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 LSPs platform. 
      • These platforms often resort to reckless practices by lending beyond a borrower’s repayment capacity.

    What are the new guidelines?

    • Objective:
      • The digital lending modified guidelines aim to protect customers from exorbitant interest rates and keep a check on unethical loan recovery practices.
      • The regulatory framework is basically focussed on the digital lending ecosystem of RBI-regulated entities and the lending service providers. 
    • Loan disbursals and repayments:
      • These are to be executed only between the bank accounts of the borrowers and the regulated entities such as the banks and the NBFCs.
      • There will be no pass-through/pool account of the Lending Service Providers (LSPs). 
    • Fees and Charges:
      • Any fees or charges payable to Lending Service Providers (LSPs) in the credit intermediation process shall be paid directly by Regulated Entities and not by the borrower.
    • Applicability:
      • Instructions are only applicable for the existing customers availing fresh loans and to new customers getting onboarded.
    • Data collection:
      • Data collected by digital lending apps must be need-based, with the borrower’s prior consent, and can be audited if required.
    • Increase in credit limit:
      • Borrower’s consent on the increase in the credit limit is must. 
      • An automatic credit increase without the consent would be prohibited.
    • Grievance redressal officer: 
      • A nodal grievance redressal officer will also be deployed.
      • Such grievance redressal officers shall also deal with complaints against their respective Digital Lending Apps (DLAs).
        • Digital Lending Apps (DLAs) are mobile and web-based applications with user interfaces that allow a borrower to borrow from a digital lender.  
    • Ombudsman: 
      • The borrower can complain to the Integrated Ombudsman Scheme of the RBI if their grievance is not resolved by the bank within 30 days.
    • Credit Information Companies (CICs):
      • 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.

    Major Issues

    • LSPs often resort to reckless lending practices by endowing credit beyond a borrower’s repayment capacity. The risk is mitigated by spreading it to all users by charging higher interest rates. 
    • There is absence of standardised disclosure and regulatory norms which made it cumbersome to assess a participant’s operational legitimacy.
    • Unregulated apps: There were about 1,100 lending apps available for Indian android users of which about 600 were illegal. They were either unregulated by the RBI or had NBFC partners with an asset size of less than 1,000 crore, prompting doubts on its operability.
    • The space is largely dominated by NBFCs: Its customers particularly include small borrowers without a documented credit history and thus, not served by traditional financial institutions.
    • Others: The concerns primarily relate to unbridled engagement of third parties, mis-selling, breach of data privacy, unfair business conduct, charging of exorbitant interest rates, and unethical recovery practices. 

    Significance

    • Tackling concerns: The guidelines aim to tackle concerns like unscrupulous lending practices and involvement of third parties, mis-selling and data privacy. 
    • Regulated market: Licensed and compliant players will have an advantage over fintech’s with other NBFC partnerships and are likely to see rising market share in the future.
    • Financial inclusion: with new innovations underway, digital lending has enabled many Financial Service Providers a way to offer much better products to the masses at a much faster rate which is even more cost-efficient.
    • Reaching to the remotest area: Digital lending can prove to be a tool acting towards the growth of higher quality financial services to underserved businesses and people.
    • Avoiding delay: Online lending has played a pivotal role in evading cumbersome red-tapism usually involved while availing loans offline in a traditional setting.

    Way forward

    • The need of the hour is competent systems and processes that would further strengthen data privacy and security of confidential information shared between customers and regulated entities.
    • This regulation would also address concerns emanating from TechFin which are companies that are primarily tech-based service providers, say e-commerce, and also offer financial services. 

    Enhanced Access and Service Excellence (EASE) Program

    • It was launched in 2018.
    • It is driven by Indian Banks’ Association (IBA).
    • EASE aims to foster new-age reforms in Public Sector Banks (PSBs) to improve profitability, asset quality, customer service and digital capabilities. 
    • The EASE programme sets a common reforms agenda for public-sector banks every year. 
      • It stresses on data analytics, automation, and digitization.
    • The fourth edition of EASE was focussed on technology-enabled simplified and collaborative banking.
    • EASE 5.0 will continue to focus on driving an enhanced digital experience along with data-driven, integrated, and inclusive banking across all banks.

    Source: TH