RBI Issues Stringent Norms For Digital Lending Services Aimed at Curbing Malpractice

The Reserve Bank of India (RBI) on Wednesday mandated that digital loans must be credited directly in the bank accounts of borrowers and not through any third party, as it put in place strict norms to curb rising malpractice in digital lending space. Besides, the RBI said digital lending entities and not the borrowers should pay fees or charges payable to Lending Service Providers (LSPs) in the credit intermediation process.

Issuing a detailed set of guidelines for digital lending, the RBI mentioned about the concerns primarily related to unbridled engagement of third parties, mis-selling, breach of data privacy, unfair business conduct, charging of exorbitant interest rates, and unethical recovery practices.

The RBI had constituted a Working Group on 'digital lending including lending through online platforms and mobile applications' (WGDL) on January 13, 2021.

It further said regulatory framework to support orderly growth of credit delivery through digital lending methods while mitigating the regulatory concerns has been firmed up.

"This regulatory framework is based on the principle that lending business can be carried out only by entities that are either regulated by the Reserve Bank or entities permitted to do so under any other law," it said.

The Reserve Bank's regulatory framework is focused on the digital lending ecosystem of RBI's Regulated Entities (REs) and the LSPs engaged by them to extend various permissible credit facilitation services.

"All loan disbursals and repayments are required to be executed only between the bank accounts of borrower and the RE without any pass-through/ pool account of the LSP or any third party," the RBI said.

Also, any fees, charges, payable to LSPs in the credit intermediation process shall be paid directly by RE and not by the borrower, it added.

It further said a standardized Key Fact Statement (KFS) must be provided to the borrower before executing the loan contract.

This has been mandated to be followed by REs, their LSPs, and Digital Lending Apps (DLAs) of REs, among others.

If any complaint lodged by the borrower is not resolved by the RE within the stipulated period (currently 30 days), he/she can lodge a complaint under the Reserve Bank – Integrated Ombudsman Scheme (RB-IOS).

The RBI further said data collected by DLAs should be need- based, have clear audit trails and only done with prior explicit consent of the borrower.

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

RBI also said certain recommendations of the working group have been accepted in-principle, but they require further examination.

Also, there are recommendations which require wider engagement with the central government and other stakeholders in view of the technical complexities, setting up of institutional mechanism and legislative interventions.