RBI releases regulatory framework for digital lending

The Reserve Bank of India (RBI) on Wednesday said that based on the inputs received from the Working Group on 'digital lending including lending through online platforms and mobile apps' (WGDL), it has firmed up a regulatory framework to support orderly growth of credit delivery through digital lending.

The panel was set up on January 13, 2021 by RBI. The framework is based on the principle that lending business can be carried out only by entities that are either regulated by the central bank or entities permitted to do so under any other law.

"All loan disbursals and repayments are required to be executed only between the bank accounts of the borrower and the regulated entity without any passthrough/ pool account of the loan service provider or any third party," the central bank stipulated.

It also said that all fees and charges payable to the loan service provider will have to be paid by banks and non-banks and not by the borrower.

As part of its digital lending guidelines the RBI also mandated that all-inclusive costs of digital loans will be required to be disclosed to borrowers. Entities will have to provide a cooling-off period during which the borrowers can exit digital loans by paying the principal and the proportionate costs without any penalty.

Entities regulated by the RBI will also have to ensure that all loan service providers engaged by them will have a suitable nodal grievance redressal officer to deal with digital lending-related complaints.

Banks and non-banks will have to ensure that digital lending apps onboarded by them prominently display information relating to the product features, loan limit and costs involved.

While some recommendations of the panel have been accepted for immediate implementation, some have been accepted in-principle and will require further implementation. Some recommendations require wider engagement with the central government and other stakeholders in view of the technical complexities, setting up of institutional mechanism and legislative interventions.

As per the list of accepted recommendations, it is now prohibited to increase the credit limit automatically without the explicit consent of the borrower. If any complaint lodged by the borrower is not resolved by the regulated entities (RE) within the stipulated period (currently 30 days), they can lodge a complaint under the Reserve Bank – Integrated Ombudsman Scheme (RB-IOS)7. These have been aimed at customer protection.

When it comes to data protection, the data collected by Digital Lending Apps (DLAs) have to be need-based, should have clear audit trails and should be only done with the prior explicit consent of the borrower, the RBI has said.

Borrowers may be provided to the borrowers to accept or deny the consent for use of specific data, including the option to revoke previously granted consent, besides the option to delete the data collected from borrowers by the DLAs/ LSPs (Lending Service Providers).

REs have to provide a Key Fact Statement (KFS) to the borrower before the execution of the contract in standardised format for all digital lending products. Any fees, charge, etc., which is not mentioned in the KFS cannot be charged by the REs to the borrower at any stage during the term of the loan.

The RBI has also mandated loans to be reported to credit bureaus.

"Any lending sourced through DLAs is required to be reported to Credit Information Companies irrespective of its nature or tenor," the regulator noted. "All new digital lending products extended by regulated entities over merchant platforms involving short term credit or deferred payments are required to be reported to CICs."