Authored by Amit Shroff, CEO, Arvog
The Reserve Bank of India (RBI) recently released revised guidelines on digital lending in India, which aim to regulate the sector and protect consumers from unfair practices. The guidelines come in response to the growing popularity of digital lending platforms in the country, which have seen a surge in demand due to the COVID-19 pandemic.
Digital lending refers to the process of providing loans to customers through digital platforms, such as mobile apps or websites. These platforms have become increasingly popular in India, particularly among individuals who have limited access to traditional banking services.
The flow of funds in the context of digital lending platforms for such customers involves the following steps:
The borrower applies for a loan through a digital lending platform.
The lender assesses the borrower's creditworthiness and decides to approve or reject the loan application.
If the loan is approved, the lender transfers the loan amount to the borrower's bank account through a digital payment system.
The borrower uses the loan amount for the intended purpose, such as paying off debts, buying goods, or investing in a business.
The borrower repays the loan amount to the lender through the digital payment system, along with any interest and fees that may be applicable.
However, the rapid growth of the sector has also led to concerns about predatory practices and a lack of transparency. The revised guidelines issued by the RBI seek to address these concerns by setting out a framework for digital lending platforms to follow.
The digital lending norms in India are applicable to all entities that engage in digital lending activities, including:
Non-Banking Financial Companies (NBFCs).
Peer-to-Peer (P2P) lending platforms.
Digital lending platforms operated by banks or other financial institutions.
Microfinance institutions (MFIs) that offer digital lending services.
Other entities that engage in digital lending activities, including fintech startups, payment banks, and small finance banks.
The guidelines cover a range of issues, including eligibility criteria, interest rates, and collection practices. One of the key provisions of the guidelines is the requirement for digital lending platforms to disclose key information about their loans, such as interest rates, fees, and charges, in a clear and transparent manner. This is intended to help consumers make informed decisions about borrowing and avoid falling into debt traps. Lenders are also required to furnish various disclosures in their Key Facts Statement (KFS) to ensure transparency and protect the interests of borrowers. The KFS is a standardized document that provides a summary of the loan terms and conditions, including the interest rate, fees, charges, repayment schedule, collateral requirements and other key features of the loan.
There are exemptions to certain categories of lenders that do not fall into the regulatory framework laid down by the RBI. These exemptions are typically granted to entities that have a limited scale of operations or engage in lending activities that do not pose as a significant risk to the financial system.
An example of this are certain microfinance institutions (MFIs) that provide loans to low-income borrowers are exempt from certain provisions of the RBI's guidelines for digital lending, provided that their lending activities comply with the guidelines issued by the National Bank for Agriculture and Rural Development (NABARD).
Similarly, the RBI has granted certain exemptions to digital lending platforms that operate as intermediaries between lenders and borrowers and do not hold any funds or take any credit risk. For example, Payment Aggregators (PA) remain out of the ambit of the RBI guidelines on digital lending as long as the PA does not perform the role of an LSP (Lending Service Provider).
A Lending Service Provider (LSP) is an entity that provides loans or credit to individuals or businesses. These entities can include banks, non-banking financial companies (NBFCs), microfinance institutions (MFIs), digital lending platforms, and other financial institutions that offer lending services.
However, these platforms are still required to comply with the guidelines and regulations laid down by the RBI for digital lending, including borrower assessment, documentation, interest rates, and recovery practices.
The guidelines also require digital lending platforms to follow fair practices when assessing the creditworthiness of borrowers. This includes using reliable data sources and ensuring that credit decisions are made in a transparent and non-discriminatory manner.
One of the most prominent features under the guidelines for digital lending is the approval of co-lending between NBFC’s even to priority sector borrowers. The co-lending arrangement involves two entities, namely the lead lender and the co-lender. The lead lender is an NBFC with at least 50% of the loan amount on its books and acts as the primary interface with the borrower. The co-lender, on the other hand, is typically a bank or an NBFC that joins the arrangement to provide funding for the remaining portion of the loan. This is designed to increase the flow of credit to priority sector borrowers and promote the development of the digital lending ecosystem in India.
Another important provision of the guidelines is the requirement for digital lending platforms to ensure the privacy and security of customer data. This includes implementing robust data protection measures and obtaining explicit consent from customers before sharing their data with third parties. The RBI has also set out guidelines for the recovery of loans, including a requirement for digital lending platforms to provide customers with a minimum of three days' notice before initiating recovery proceedings. The guidelines also prohibit lenders from using abusive language or engaging in harassment when attempting to recover loans.
The revised guidelines represent an important step towards regulating the digital lending sector in India and protecting consumers from predatory practices. The guidelines are expected to have a significant impact on the sector, which has seen explosive growth in recent years. However, some experts have raised concerns that the guidelines may stifle innovation and limit access to credit for individuals who are unable to meet the stringent eligibility criteria. There are also concerns about the ability of regulators to effectively monitor and enforce the guidelines, particularly given the large number of digital lending platforms operating in India.
Despite these challenges, the RBI's revised guidelines are an important development for the digital lending sector in India. By setting out clear standards for digital lending platforms to follow, the guidelines have the potential to promote fair and transparent lending practices and protect consumers. It will be important for regulators to continue to monitor the sector and make adjustments to the guidelines as needed to ensure that they remain effective in the face of changing market conditions.