Synopsis: In today’s blog, we will analyze how RBI’s newly-implemented digital lending guidelines will balance customer rights protection with financial innovation.

The digital lending market has been scaling new heights—some estimate a 4.75x growth to $1.3 trillion by 2030. While it has been a boon for credit-deprived individuals and businesses alike, this growth has been shadowed by a spate of online frauds, mis-selling, and data privacy breaches.

The situation worsened further during the pandemic years due to several digital lenders charging exorbitant interest rates for extending credit and employing unethical recovery methods.

As a result, RBI has released guidelines on digital lending that strive to nip regulatory arbitrage practices followed by digital lenders in the bud while giving a fillip to customer rights protection.

So, what are the various provisions of RBI’s digital lending framework, and how will they protect clients’ interests? Let’s find out.

5 Ways RBI’s Digital Lending Guidelines Protect Customer Rights

To prevent further erosion of consumer trust in the lending landscape, RBI introduced digital lending guidelines to ensure that lending is carried out only by central bank-regulated entities (REs) and lending service providers (LSPs) tied to them for credit facilitation. Such REs include banks, NBFCs, co-operative banks, and state co-operative banks. 

These digital lending provisions aim to regulate the entire lending chain by recommending stringent data privacy practices and complete transparency to all borrowers.

#1 Concern: Rampant Third-Party Engagement and Unfair Business Conduct

Provisions: Direct Disbursals, Credit Limits, and Prepayments and Cool-off Period

Due to frequent and incessant tie-ups between fintechs and partner banks, the lines had blurred about who was really lending to the end customer. Thus, RBI’s guidelines aim to bring transparency to the loan execution and disbursal process.

Now, REs are mandated to directly disburse funds into the borrowers’ accounts without routing them through any third party’s pool or a pass-through account. Similarly, all loan servicing and repayments must be made directly into the RE’s account. Hence, funds can no longer be moved into the accounts of loan service providers (LSPs) and digital lending apps (DLAs).

However, exceptions can be made for loans disbursed under a statutory mandate or extended against a specific end use as long as they are distributed directly to the end beneficiary’s account. An exception has also been made for loans extended under co-lending transactions.

Additionally, lenders are prohibited from automatically increasing a customer’s credit limit without explicit consent.

Also, all digital loans’ terms must provide for a look-up or cooling-off period, where borrowers can prematurely exit a loan contract without incurring penalties. This is especially useful for customers who may, later, find the loan terms untenable, and prefer switching to a better loan provider.

Plus, even if borrowers choose to continue with their digital loans after the cool-off period is up, they must have the option to prepay their loans per extant other RBI guidelines.

#2 Concern: Mispricing and Extortionate Interest Rates

Provisions: Key Fact Statement, Annual Percentage Rate, and Other Details

For a while, customers have been demanding transparency and complete disclosure in pricing, alleging a levy of excessively high-interest rates and charges by digital lenders.

Per the latest digital lending guidelines, all charges will be paid directly by the lenders to their LSPs for their services; borrowers are no longer required to make any payments to LSPs.

Additionally, lenders must provide their borrowers with a standardized Key Fact Statement (KFS) before the loan execution. It must entail the details of the annual percentage rate (APR), which is the all-inclusive cost of availing of a digital loan. It includes the cost of funds, operating costs, credit costs, processing fees, maintenance charges, and verification charges. 

Consequently, customers will know the effective cost of a loan instead of being misled by marketing gimmicks wherein Digi-lenders display low sticker rates for unviable, short-term loans.

Furthermore, KFS will enclose details of recovery mechanisms, grievance redressals, and cooling-off periods.

Moreover, penal charges can only be levied on the outstanding loan amount, and the annualized penal rates must be disclosed to the borrower in the KFS.

#3 Concern: Mis-selling and Lack of Transparency

Provisions: LSPs’ List and Disclosure Requirements

Going forward, REs will need to publish a list of all their LSPs and DLAs on their website. Additionally, REs must compulsorily display all information about their credit products, loan limits, and costs at the time of customer onboarding.

Following the contract execution, REs must automatically share digitally signed documents, such as KFS, loan summary, terms, sanction letter, account statements, and privacy and recovery policies, with the borrowers via email/SMS.

#4 Concern: Data Privacy Breaches

Provisions: Privacy Policy, Cybersecurity Provisions, and Consent

To avoid monetization of the private data of borrowers, RBI has stipulated several rules to ensure data privacy. Consequently, REs and their DLAs can only access information on a ‘need’ basis after acquiring the borrower’s explicit consent to ensure proper audit trails.

Besides, no biometric information can be stored in the systems. Lenders must also prominently display privacy policies to borrowers.

Also, the customers must have the right to deny specific data usage and retention, revoke consent, and restrict data disclosure to third parties unless required by statute.

Furthermore, to prevent any data leakages, REs and their LSPs must adhere to stringent technology and cybersecurity regulations postulated by RBI.  

#5 Concern: Unethical Recovery Practices and Grievance Redressal

Provisions: Appointment of Redressal Officers and Proper Reporting

RBI has received almost 13,000 complaints in the last 19 months (April ‘21- November ‘22) about facing harassment from recovery agents engaged by digital lenders. 

To deal with this menace, RBI has recommended communicating to the borrowers about the recovery agents assigned to them. Additionally, REs must impart guidance to their LSPs to discharge their recovery duties responsibly.

Furthermore, lenders and their agents must appoint nodal grievance redressal officers whose details must be disclosed on the website as well as in the KFS provided to borrowers.

Finally, all lending done via LSPs must be necessarily reported to credit information companies (CICs). This is targeted at minimization of customer complaints with regards to sanctioning of fake loans and impersonations.

The Final Takeaway

There is no doubt that digital lending has given new wings to India’s growth story by extending customized, cash-flow-based loan products to small businesses. However, these benefits need not come at the cost of data breaches, sky-high interest rates, and aggressive recovery practices. By implementing its digital lending guidelines, RBI is well on its way to reining in the ills of digital lending while supporting customer rights.