The Reserve Bank of India (RBI) has created a framework to regulate digital lending. Its new regulations are based on the recommendations of a working group on digital lending including lending via online platforms and mobile apps (WGDL) set up in January 2021. What are the new regulations and why were they introduced?

Who are digital lenders?

The RBI has divided digital lenders into three groups:

• Companies that are regulated by the RBI and are allowed to engage in lending business.
• Entities authorized to lend under other statutory or regulatory provisions but not subject to the supervision of RBI.
• Companies that make loans outside the scope of legal or regulatory requirements.

India’s digital lending

With digital lending, loans are issued and reclaimed via web platforms or mobile apps. It facilitates quick payouts and helps reduce costs.

Lending Service Providers (LSPs) work with Non-Banking Financial Companies (NBFCs) to disburse loans to customers through the former’s platform. However, these platforms often resort to reckless practices by lending beyond a borrower’s ability to repay.

What are the new guidelines?

Some highlights of the new guidelines are:

• All loan disbursements and repayments are to be settled between the bank accounts of the borrower and the company. This eliminates the need for the LSP to have a nodal pass-through or pool account.
• Lenders are required to notify the borrower of all fees, charges, and Annual Percentage Rate (APR) in a standardized format.
• Fees payable to LSPs in the loan origination process are paid directly by the bank and not by the borrower.
• No automatic credit limit increase can be made without the express consent of the borrower.
• Data collected by digital lending apps must be collected on an as-needed basis and with the prior consent of the borrower and may be audited if necessary.
• Banks and their associated LSPs must appoint a nodal complaints officer to deal with complaints related to fintech or digital lending.
• The borrower can complain to RBI’s Integrated Ombudsman System if his complaint is not resolved by the bank within 30 days.
• Regulated entities must ensure that all lending conducted through digital lending apps must be reported to credit information companies (CICs).
• Lending in Buy Now Pay Later (BNPL) mode must also be reported to the CICs.

Why do you need these guidelines?

The RBI commissioned these regulations to review mis-selling to customers, unethical business conduct, exorbitant interest rates, and excessive third-party involvement in digital lending deals.