All digital loans must be disbursed and repaid through bank accounts of regulated entities only, without pass-through of loan service providers (LSPs) or other third parties, the Reserve Bank of India (RBI) said in its long-awaited guidelines for the segment.
The guidelines, aimed at curbing rising malpractices in the digital lending ecosystem, follow the recommendations of a working group for digital lending, whose report was made public in November 2021. “The concerns primarily relate to the unbridled engagement of third parties, mis-selling, breach of data privacy, unfair business conduct, charging of exorbitant interest rates, and unethical recovery practices,” the RBI said in the final guidelines.
‘Digital Lenders’ are classified into three groups:
1)Entities regulated by the RBI and permitted to carry out lending business; Example Banks and NBFCs
2) Entities authorized to carry out lending as per other statutory/regulatory provisions but not regulated by RBI. For example, Rural cooperatives like ‘Primary Agriculture Credit Societies’ (PACS) regulated by State Governments
3) Entities lending outside the purview of any statutory/ regulatory provisions. For example informal lenders.
RBI had constituted a ‘Working Group’ which has given its guidelines which are applicable for the first category of lenders. And these guidelines has been accepted by RBI and has become effective.
These recommendations/guidelines are:
a) All loan disbursals and repayments are required to be executed only between the bank accounts of borrower and the Regulated Entity (RE) [like banks, NBFCs] without any pass-through/ pool account of the Lending Service Providers (LSP) or any third party.
b) Any fees, charges, etc., payable to LSPs in the credit intermediation process shall be paid directly by RE and not by the borrower.
c) A standardized Key Fact Statement (KFS) must be provided to the borrower before executing the loan contract.
d) All-inclusive cost of digital loans in the form of Annual Percentage Rate (APR) is required to be disclosed to the borrowers. APR shall also form part of KFS.
e) Automatic increase in credit limit without explicit consent of borrower is prohibited.
f) A cooling-off/ look-up period during which the borrowers can exit digital loans by paying the principal and the proportionate APR without any penalty shall be provided as part of the loan contract.
g) REs shall ensure that they and the LSPs engaged by them shall have a suitable nodal grievance redressal officer to deal with FinTech/ digital lending related complaints.
h) Data collected by DLAs should be need based, should have clear audit trails and should be only done with prior explicit consent of the borrower.
i) Any lending sourced through Digital Lending Apps (DLAs) is required to be reported to Credit Information Companies (CICs) by REs irrespective of its nature or tenor.
j) All new digital lending products extended by REs over merchant platforms (example, when you buy a product by EMI facility) involving short term credit or deferred payments are required to be reported to CICs by the REs. [Credit Information Companies are also called Credit Bureaus]
For second category of digital lenders, their regulators can bring rules. For third category, Govt. can bring in some law.