The Reserve Bank of India (RBI) has laid a new framework for digital lending. Regulated entities like All Commercial Banks, Primary (Urban) Co-operative Banks, State Co-operative Banks, District Central Co-operative Banks; and Non-Banking Financial Companies (including Housing Finance Companies) are required to comply with the new guidelines by November 30, 2022. The new rules will apply to both the existing digital loan customers and the new customers who will apply for a digital loan in the future.
Digital lending is a remote and automated lending process, largely by the use of seamless digital technologies for customer acquisition, credit assessment, loan approval, disbursement, recovery, and associated customer service. Unlike the offline lending process, where the borrower must visit the lender’s branch and apply for the loan using the physical form, digital lending allows a borrower to apply for a loan using the lender’s online platform. The digital lending process is often easy, quick, convenient, and paperless whereas in offline lending it takes time for completing the due diligence before releasing the loan.
Normally digital lenders have outsourcing arrangements with Lending Service Provider (LSP) that usually provides the digital lending platform. However, India’s Central Bank noticed that some LSPs were involved in problematic lending practices, such as allowing credit much higher than the borrower’s repayment capacity. Questions were also raised related to the security of borrowers’ data.
So, the RBI introduced new rules to streamline the process and ensure better security in the digital lending process. “It is reiterated that outsourcing arrangements entered by Regulated Entities (REs) with a Lending Service Provider (LSP)/ Digital Lending App (DLA) do not diminish the REs’ obligations and they shall continue to conform to the extant guidelines on outsourcing. The REs are advised to ensure that the LSPs engaged by them and the DLAs (either of the RE or of the LSP engaged by the RE) comply with the guidelines contained in this circular” said RBI circular.
Further, REs are also required to conduct enhanced due diligence before entering into a partnership with an LSP for digital lending, taking into account its technical abilities, data privacy policies and storage systems, fairness in conduct with borrowers, and ability to comply with regulations and statutes.
DLAs (Mobile and web-based applications with user interface) will include apps of the Regulated Entities (REs) as well as those operated by Lending Service Providers (LSPs) engaged by REs for extending any credit facilitation services in conformity with extant outsourcing guidelines issued by the Reserve Bank, it said.
Assessment of loan proposals:
REs shall capture the economic profile of the borrowers covering (age, occupation, income, etc.), before extending any loan over their own DLAs and/or through LSPs engaged by them, with a view to assessing the borrower’s creditworthiness in an auditable way. REs shall ensure that there is no automatic increase in credit limit unless explicit consent of the borrower is taken on record for each such increase.
‘Annual Percentage Rate (APR)’ is the effective annualised rate charged to the borrower of a digital loan. APR shall be based on an all-inclusive cost and margin including the cost of funds, credit cost and operating cost, processing fee, verification charges, maintenance charges, etc., and exclude contingent charges like penal charges, late payment charges, etc, the notification said. The all-inclusive cost of digital loans for the borrower shall be disclosed upfront by REs and shall also be a part of the Key Fact Statement (KFS). Any fees, charges, etc., which are not mentioned in the KFS cannot be charged by the REs to the borrower at any stage during the term of the loan.
The regulated entities (REs) like Banks and NBFCs shall ensure that all loan servicing, repayment, etc., is executed by the borrower directly in the RE’s bank account without any pass-through account/ pool account of any third party. The disbursements shall always be made into the bank account of the borrower except for disbursals covered exclusively under statutory or regulatory mandate (of RBI or of any other regulator), the flow of money between REs for co-lending transactions, and disbursals for specific end-use, provided the loan is disbursed directly into the bank account of the end-beneficiary. REs shall ensure that in no case, disbursal is made to a third-party account, including the accounts of LSPs and their DLAs, except as provided for in the guidelines issued by RBI.
It is also notified that any fees, charges, etc., payable to LSPs are paid directly by them (REs) and are not charged by LSP to the borrower directly. The penal interest/charges levied, if any, on the borrowers shall be based on the outstanding amount of the loan. Further, the rate of such penal charges shall be disclosed upfront on an annualized basis to the borrower in the Key Fact Statement (KFS).
A cooling off/ look-up period is the time window as determined by the Board of the RE which shall be given to borrowers for exiting digital loans, in case a borrower decides not to continue with the loan.
Under the new digital lending rule, only essential data will be allowed to be collected from the borrower with their prior consent, and then if required, it can be audited later. All lending including Buy Now Pay Later (BNPL) will now have to be reported to the Credit Information Companies (CIC)
Now, there would be a requirement for a nodal grievance officer to address the complaints related to digital lending or the fintech company involved in the lending process.
It is also advised by the banking regulator that REs shall ensure that any collection of data by their DLAs and DLAs of their LSPs is need-based and with the prior and explicit consent of the borrower having audited trail. In any case, REs shall also ensure that DLAs desist from accessing mobile phone resources like files and media, contact lists, call logs, telephony functions, etc. One-time access can be taken for the camera, microphone, location, or any other facility necessary for the purpose of onboarding/ KYC requirements only, with the explicit consent of the borrower.