Guidelines to Regulate Digital Lending

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    • Recently, the Reserve Bank of India (RBI) instituted a framework for regulating the digital lending landscape in the country. 

    About Digital Lending

    • Digital Lending:
      • Digital lending utilises automated technologies and algorithms for decision making, customer acquisition, disbursements and recovery. 
      • Not only does it lower costs but also ensures speedy disbursal. 
    • Digital lenders are of three kinds:
      • Those regulated by the RBI
      • Those authorised as per other statutory/regulatory provisions but not regulated by RBI
      • Entities lending outside the purview of any statutory/ regulatory provisions.
    • Working Mechanism:
      • Lending Service Providers (LSPs) act in partnership with Non-Banking Financial Companies (NBFCs) who disburse credit (or a line of credit) to the customer using the former’s platform, making it a multi-sided platform. 
    • The latest set of regulations are based on recommendations received from its Working Group on ‘Digital Lending including lending through online platforms and mobile apps’ (WGDL).
      • The working group will evaluate digital lending activities and assess the penetration and standards of outsourced digital lending activities in RBI regulated entities.
      • Identify the risks posed by unregulated digital lending to financial stability.
      • Regulated entities and consumers.
      • Suggest regulatory changes to promote orderly growth of digital lending. 

    What are the new regulations?

    • Transparency:
      • Lending must be carried out by entities that are either regulated by the RBI or possess permission to operate under a relevant law.
    • Loan disbursals and repayments:
      • The RBI has mandated that all loan disbursals and repayments are to be executed directly between the bank accounts of the borrower and the entity. 
      • Thus, it eliminates the presence of a nodal pass-through or pool account of the LSP.
    • Key fact statement (KFS):
      • Before executing the contract, lenders would have to inform the borrower in a standardized format about all fees, charges as well as the annual percentage rate (APR).
    • Annual rate:
      • It refers to the annual rate that is charged for borrowing a loan and is inclusive of processing fees, penalties and all other charges associated with it. 
      • This would also help borrowers make better comparisons with industry peers.
    • Cannot raise the credit limit:
      • LSPs cannot raise the credit limit of their customers without prior consent.
    • Grievance redressal officer:
      • To address the need for a dedicated resolution framework, entities would have to appoint a grievance redressal officer.
    • RB-IOS:
      • The ecosystem would also fall under the purview of the RBI’s Integrated Ombudsman Scheme (RB-IOS) should the complaint not be resolved within 30 days of receipt.
    • Regulation of Data:
      • All data collected by the apps should be “need-based” and must be with prior and explicit consent of the borrower. 
      • Users can also revoke previously granted consent. 
      • The information to be collected must be stated in the privacy policy during enrolment.
      • RBI has put forth that user consent would be mandatory for sharing any personal information with a third-party.

    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. 
    • The absence of standardised disclosure and regulatory norms made it cumbersome to assess a participant’s operational legitimacy.
    • 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. 

    Way Forward

    • 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.
    • Share: The share of digital lending may be small at present, but given their scalability they may potentially become significant players soon.
    • With the economic activity reviving at a decent pace post pandemic and our expectations of a GDP growth of 7.3% this fiscal it is expected that demand for loans across the credit ecosystem will be higher this fiscal despite higher inflation and interest rates.
    • The guidelines are aimed at curbing rising malpractices in the digital lending ecosystem. 

    Source: TH