RBI Guidelines on Digital Lending in India: Digital Lending Trends & Highlights
Digital lending is the process that provides financial institutions with an opportunity to make borrowings and enhance productivity to facilitate lending services. Technology becomes advantageous in digital lending since confidential information is kept intact. Digital lending has altered the face of the pre-existing lending system in India. Owing to digital lending, the opening of an account, paperless transactions, loan application procedures, and providing loans to no-credit customers or the lending sector, have undergone a significant transformation. In addition, FinTech companies are encouraging paperless lending, which has amplified opportunities and accessibility for the Indian lending market.
On September 2, 2022, the Reserve Bank of India (RBI) published «Guidelines on Digital Lending» to the banks and non-banking finance firms (NBFCs) in response to the press release it made on August 10, 2022, on the implementation of the Working Group on Digital Lending's recommendations.
1. These guidelines apply to regulated lending entities (RE) to digital loans provided by Commercial Banks, State Co-operative Banks, Primary (Urban) Co-operative Banks, District Central Co-operative Banks, and Non-Banking Financial Institutions (NBFCs).
2. Current customers while applying for new loans and new customers that sign up (starting on September 2, 2022) as well as for current digital loans, REs have until November 30, 2022, to comply with the Guidelines.
3. All loan payments must only be made through the borrower's and RE's respective bank accounts. The lending service providers (LSP) or any third party aren’t allowed to have any passthrough or pool accounts. There are limited exceptions to the norm, including payments made between REs for co-lending transactions, payments made for particular end uses, and payments made as long as the loan is transferred into the end-bank beneficiary's account.
4. Borrowers must be provided a look-up time, as decided by the RE board, to exit digital loans by paying the principal and corresponding APR without incurring any fees. For loans with a seven-day or more period, the cooling-off period cannot be less than 3 days; for loans with a term of fewer than seven days, it cannot be less than 1 day.
5. Guidelines mention the collection of fees and charges provisions, disclosure requirements to borrowers, and the standardized format of the key fact statement provided by a RE
6. Data collection is only authorized by Digital Lending Apps(DLAs) with the borrower's express prior authorization. Access to mobile phone resources is not allowed for DLAs. Only with the borrower's express permission may one-time access be granted for any requirement for onboarding or KYC needs. Data storing is also not permitted except with minimal data for carrying out operations. The borrower must be given the choice of restricting disclosure to third parties, limiting data retention, and rescinding previously given consent to collect his personal information. The borrower may also request that the app delete or forget the data.
7. REs must abide by the provisions of the Master Direction — Reserve Bank of India (Securitization of Standard Assets) Directions, 2021 dated September 24, 2021 (Securitization Directions), particularly the directions on synthetic securitization found in the Securitization Directions, concerning contractual arrangements for First loss default guarantees (FLDGs)
Regulatory tightening in the Booming India digital lending sector
The RBI raised concerns on unauthorized digital lending in India back in 2020. Subsequently, in a press release, it was clarified that the high numbers of such unauthorized DLAs and unethical loan recovery practices raise the requirement of disclosure of the NBFC and banks involved in digital lending. The RBI issued a report in 2021 addressing the concerns in customer protection and business conduct and recommended enhancement of the protection norms in online borrowing.
The latest guidelines of 2022 that were implemented from December 1st of 2022 provide for a protectionist framework for customers. Additionally, it strengthens the technology that addresses issues in the digital lending platform. These guidelines ensure compliance and help in understanding the way forward.
Impact on FinTech Companies & Global trends in Digital Lending
Owing to digital lending the loan offering criteria has become much more expansive. The automated and data-centric loan approval process allows lenders to make informed decisions. Fintech lending empowers P2P and business borrowers in enhancing their financial well-being and independence.
India Lends introduced Digital Lending 2.0 in April 2020, a selection of touchless and contactless goods that includes insurance, loans, and a line of credit. The fast adoption of digitalization in the BFSI sector has impacted the lending environment. Well-known businesses in the financial sector that have made significant AI investments include Aire, Kabbage, and Kasisto. The two fintech firms, UI Enlyte and Exaloan, in April 2022, announced establishment of a strategic organization. The corporations will connect their loan and digital asset platforms through this project. Digital lending companies like Finserv, FIS, Newgen Software, Nucleus Software, Pega, Temenos, and many Indian, US, and Swiss companies have adopted digital lending trends to expand in the global market.
The 2022 guidelines lay down the procedure for grievance redressal in addition to the procedure for the appointment of an officer. The guidelines help in keeping data and customers open to transparent loan execution. The disclosure norms promote consumer interests.
The implementation of Fintech business models requires an experienced team that assists in compliance and abidance of the current legal framework. KSK ensures that these requirements are met in the legal regime.