Getting a personal loan today has become a very easy process. You could simply apply for one through a digital lending app on your smartphone and get approvals and disbursals quickly. But, at the same time there are growing concerns about how the companies access and use personal data, very high interest rates and fees that are charged by the companies among other things.
The Reserve Bank of India (RBI) has now tightened digital lending norms, importantly keeping third parties out of the process.
The RBI noted that innovative methods of designing and delivery of credit products and their servicing through digital lending route have acquired prominence in recent times. However, certain concerns had also emerged which, if not mitigated, may erode the confidence of members of public in the digital lending ecosystem, the central bank added.
The RBI had set up a working group on digital lending, including lending through online platforms and mobile applications back in January 2021. A regulatory framework has now been firmed up taking into account inputs from various stakeholders.
This regulatory framework is focused on the digital lending ecosystem regulated by RBI and the lending service providers (LSP) they engage to extend credit facilitation services.
A key guideline is that all loan disbursals and repayments will have to be executed only between the bank accounts of borrower and the regulated entity without any pass through or pool account of the LSP or any third party. The fees and charges to the LSP will also have to be paid directly by the entities and not the borrowers. The borrowers will also have to be disclosed all-inclusive cost of digital loans in the form of annual percentage rate (APR) and automatic increase in credit limit without explicit consent of the borrowers will also be prohibited.
Furthermore, as a part of the contract, regulated entities will have to also provide a cooling-off or look-up period, during which borrowers will be able to exit digital loans by paying the principal and the proportionate annual percentage rate, the RBI norms specify.
In recent times data protection and management has also become a major area of concern. In this context, the RBI norms state that the data collected by the digital lending apps will have to be need-based, have clear audit trails and done only with prior explicit consent of the borrower. Moreover, the borrowers may also be given the option to accept or deny consent for use of specific data or revoke previously granted consent. There may also be an option to delete data collected from borrowers by the digital lending apps or LSPs, the regulations state.
Also under the regulatory framework, any lending sourced through digital lending apps will have to be reported to credit information companies irrespective of its nature or tenor. Also, new digital lending products extended by regulated entities over merchant platforms involving short-term credit will have to be reported to the credit information companies.
Experts say the RBI guidelines on digital lending is a step towards curbing concerns related to data privacy breach, unfair business conduct, charging exorbitant interest rates and unethical recovery practices.
“These guidelines will bring in transparency and enhance customer confidence. The guidelines also demarcate the roles and responsibilities of regulated entities and LSPs,” said Saurabh Puri, chief business officer, credit cards at Zaggle, a fintech startup.
Sameer Aggarwal, CEO and founder of RevFin, a digital lending company, also says the guidelines will bring transparency and credibility to digital lending, while protecting consumer interests. He expects the RBI to allow sufficient time for the implementation of the various recommendations and create a smooth process for the ongoing functioning of the digital lending ecosystem.
Swapnil Bhaskar, head of strategy at neobank Niyo says the guidelines seem quite customer friendly in terms of transparency of the product. “However, it may increase some tech and security cost for fintechs and also friction on user experience as there will be stricter controls on money movement and bureau reporting even for products like small ticket BNPL (buy now pay later products),” he said.
Anand Dama of Emkay Global Financial Services says the guidelines appear less taxing for the digital lending space compared with the draft guidelines.“They miss clarity on few other important aspects, including FLDG (first loss default guarantee), predatory pricing and separate license for digital lenders,” said Dama.
Recently the RBI had barred prepaid wallets and prepaid cards from offering credit lines. Some of the companies are now simply offering BNPL products under the garb of personal loans via bank accounts, possibly defying the RBI guidelines in spirit, and this needs to be curbed, feels Dama.
“The RBI should also bring comprehensive guidelines to regulate app-based BNPL players to curb unbridled growth in risky products such as BNPL,” he said. The new guidelines are silent on the proposal to mandate fintechs and digital lenders to register as digital NBFCs, which would have been an important regulation, Dama added.
