The Reserve Bank of India (RBI) has issued the Digital Lending Directions, 2025, to regulate the rapidly evolving digital lending ecosystem in India. Digital lending refers to the end-to-end automated loan process conducted remotely using digital platforms, encompassing customer acquisition, credit assessment, loan approval, disbursement, servicing, and recovery.
While digital lending has significantly enhanced credit accessibility and convenience, its accelerated growth has raised several regulatory concerns. Issues such as misleading product information, hidden fees, predatory recovery practices, data privacy breaches, and the involvement of unregulated entities have threatened consumer trust and financial stability. The new regulatory directions aim to mitigate these risks by strengthening transparency, borrower protection, and accountability.
Overview and Applicability
The Digital Lending Directions, 2025 consolidate previous circulars and introduce new provisions for arrangements involving Lending Service Providers (LSPs) and Regulated Entities (REs) such as banks and Non-Banking Financial Companies (NBFCs). These guidelines are applicable to digital loans disbursed through any platform defined as a Digital Lending App or Platform (DLA), operated either by an RE or an LSP.
Key Regulatory Measures
- RE–LSP Relationship and Governance
REs may engage LSPs to perform one or more functions in the digital lending value chain, such as customer acquisition, underwriting, monitoring, servicing, or recovery. Such arrangements must be governed by formal agreements that define the roles, rights, and responsibilities of each party.
REs are required to:
- Undertake enhanced due diligence before entering into contracts with LSPs, assessing their technological competence, data protection protocols, ethical practices, and regulatory compliance history.
- Periodically review the LSP’s performance and enforce corrective actions in case of contractual deviations.
- Establish internal monitoring mechanisms for loan portfolios originated in partnership with LSPs.
- Provide explicit guidance to LSPs acting as recovery agents and ensure adherence to RBI recovery norms.
Importantly, outsourcing any function to an LSP does not dilute the RE’s regulatory responsibilities. The RE remains fully accountable for the acts and omissions of the LSP.
- Loan Offer Presentation and Matching Mechanism
LSPs must ensure that all digital loan offers displayed through DLAs are transparent, unbiased, and allow fair comparisons across products. The digital interface should:
- Display the name of the RE offering the loan, loan amount, tenor, Annual Percentage Rate (APR), monthly repayment obligation, and penal charges.
- Provide a link to the Key Fact Statement (KFS) for each loan.
- Include the names of unmatched lenders, if any.
- Avoid the use of deceptive design practices (“dark patterns”) that may mislead borrowers.
LSPs are permitted to rank offers using a publicly disclosed, objective metric, but must maintain consistency in offer matching across similar borrowers and products.
- Credit Assessment and Limit Management
Before sanctioning a loan, the RE must collect and maintain data related to the borrower’s economic profile, such as age, occupation, and income. Automatic increases in credit limits are prohibited unless explicitly requested and approved by the borrower.
- Mandatory Disclosures to Borrowers
REs must provide the following documents digitally, duly signed and on official letterhead, immediately upon loan approval:
- Key Fact Statement (KFS)
- Summary of the loan product
- Sanction letter and terms and conditions
- Account statements
- Privacy policies of the RE and/or LSP regarding data use and storage
Additionally, REs must maintain an updated public-facing website displaying all relevant loan terms and conditions in a centralized and easily accessible format.
- Loan Disbursal and Repayment
To ensure financial integrity:
- All loan disbursements must be credited directly to the borrower’s bank account, except in specific, regulated scenarios (e.g., co-lending or end-use mandated disbursements).
- Loan servicing and repayments must be made by the borrower directly to the RE’s bank account. Use of intermediary or pooled accounts, including those of LSPs, is strictly prohibited.
- Fees payable to LSPs must be borne by the RE and not charged to borrowers either directly or indirectly.
- In cases of delinquency, physical cash recovery is permitted but must be transparently reflected in the borrower’s account the same day.
- Cooling-off Period and Prepayment
Borrowers must be provided with a “cooling-off period” during which they may exit the loan by repaying the principal and proportionate interest without incurring penalties. The minimum duration for this period is one day, as determined by the RE’s internal policy.
If a customer exits the loan within the cooling-off period, the RE may charge a reasonable one-time processing fee, which must be disclosed in the KFS.
- Grievance Redressal
REs and LSPs with direct borrower interaction are required to appoint designated Grievance Redressal Officers to handle complaints related to digital lending. These officers must be adequately trained and empowered to resolve issues in a timely and effective manner.
Conclusion
With the Digital Lending Directions, 2025, the RBI reinforces its commitment to responsible innovation in India’s financial sector. These comprehensive guidelines are intended to preserve the integrity of digital lending while ensuring that borrowers receive transparent, fair, and secure access to credit. By holding both REs and LSPs accountable, the RBI aims to foster a trustworthy and inclusive digital credit environment.
Source: Reserve Bank of India official website
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