RBI tightens rules for digital lending
Following accusations that lending apps were charging usurious interest rates, pursuing aggressive recovery techniques, committing fraud, and violating data privacy, the Reserve Bank of India announced rules for digital lending platforms on Wednesday to guarantee orderly growth and safeguard borrowers.
The regulations, which are only applicable to companies and lending service providers under RBI regulation, require them to inform borrowers of the whole cost of digital loans and prohibit lenders from automatically raising credit limits without the borrower’s permission.
To regulate the organizations, the RBI established a working group on digital lending in January 2021, which includes lending through online platforms and mobile apps. The new regulations are founded on the idea that only organizations that are either governed by the central bank or legally licensed to do so may engage in lending activities.
The new regulations require regulated organizations to make sure that loan servicing and repayments take place directly in their bank accounts, without using a pass-through or pool account from a third party. Additionally, the disbursements must go into the borrower’s bank account.
The RBI further stated that the regulated company, not the borrower, should pay any fees or charges due to lending service providers.
Additionally, regulated organizations must offer a grace period during which borrowers can cancel their digital loans by paying the principle plus any associated fees without incurring any penalties. Additionally, all loan service providers who are employed by regulated businesses must have a nodal grievance redressal officer to handle complaints relating to digital lending.
Executives from the fintech sector said that the rules would not impede innovation. “Based on our first findings, we think the regulator is not attempting to restrict innovation in fintech, which is fantastic.
To safeguard the interests of consumers, however, there must be certain boundaries. Unchecked innovation has in the past produced disastrous outcomes, such as fake apps. According to Kunal Varma, co-founder and CEO of the fintech company Freo, regulated firms are responsible for compliance.
“The regulator aims to make sure that money moves via authentic KYC accounts with transparent audit trails.” He noted that this would help stop unethical loan practices and aid customers in developing sound credit habits. Additionally, the RBI has pushed for increased disclosures to borrowers and transparency.
It says that before the loan contract is signed, the borrower must receive an “important fact statement.” The annual percentage rate (APR), which includes interest rates, fees, origination expenses, discount points, and agency costs, must be disclosed to the borrower. Automatic credit limit increases without the borrower’s express authorization are forbidden.
The RBI further stated that lending platforms must offer a look-up or cooling-off period during which borrowers may cancel their digital loans by paying the principle plus the appropriate APR without incurring any fees. The revised notification also places a strong emphasis on customer recourse options. Regarding the use of technology and data, the RBI stated that lending apps should only gather data that is necessary, with clear audit trails and the borrowers’ prior express agreement.
The option to accept or reject consent for the use of certain data, as well as the ability to revoke previously granted consent, may be offered to borrowers. The regulated organizations must also make sure that every loan conducted through lending applications, regardless of nature or tenor, is reported to credit information agencies. The new regulations, according to Sugandh Saxena, CEO of the Fintech Association for Consumer Empowerment, would improve consumer safety in the digital lending industry.
“It is also crucial that, as soon as the rules go into effect, borrowers will have the ability to accept or reject authorization for the use of any specific data, including the ability to revoke the consent that has already been given.” This will enable consumers to take control of their data rights. Additionally, the framework reaffirms the necessity of a self-regulatory body and its function in assisting the development of the digital lending industry while keeping consumer safety at its heart, according to him.
While some of the panel’s suggestions have been approved for immediate execution, others have just been approved in theory and will require more thought. Given the technical difficulties, the establishment of institutional processes, and legislative initiatives, several solutions call for further involvement with the government and other stakeholders.
The first loss default guarantee (FLDG) recommendation is now being looked at by the RBI. In the meantime, regulated entities must make sure that financial products involving contracts in which a third party promises to cover up to a certain percentage of default in a loan portfolio of the regulated entity abide by the current rules outlined in Master Directions of Securitization of Standard Assets 2021.
The RBI has also recommended some actions for the Union government to take in addition to the suggestions. It suggested that the government limit the use of balance sheet lending via apps to organizations under RBI regulation and those explicitly registered under other laws to conduct lending activities. According to the statement, the government may think about drafting laws that would prohibit any businesses not registered with the RBI from engaging in unregulated lending operations.
The RBI also suggested that a separate organization called the Digital India Trust Agency be established to guarantee that only authorized and reliable lending applications are utilized by customers. Additionally, it suggested establishing a national financial crime records bureau with a data registry resembling the crime and criminal monitoring network and systems, much like the National Crime Records Bureau.
edited and proofread by nikita sharma