As the digital revolution took over the regular life of people by storm, there are not many areas that remain uninterrupted by it. With the huge impetus given to Digital India by the Government of India, the domain of finance and accounting has also undergone tremendous changes.
Beginning with online payment with the help of UPI, it has gone to newer avenues, wherein digital platforms offer credits to the user. It is widely called digital lending. Using the technology of credit assessment and authentication, websites and apps these days allow their users to lend money. Today, banks are not far behind in this domain. They have come up with their own digital lending platforms. Their experience in traditional lending further gives them the edge to sustain themselves in the market.
In India, a large section of the society depends on the unorganized sector for credit which cracks down on poor farmers and micro enterprises with their high rate of interest. In that regard, the popularity of digital lending has, in fact, bought in financial inclusion meeting the hitherto unmet credit requirements of the people. As digital lending got more popular, it became necessary to keep a check on the activities that are taking place in this domain.
The Reserve Bank of India, in August 2022 released guidelines on digital lending so as to ensure the smooth and safe conduct of transactions through digital platforms. This article will look at important parts and implications of the guidelines issued.
Applicability of the Guidelines
The Reserve Bank of India has issued these guidelines keeping in mind the lending ecosystem of Regulated Entities (RE) and Lending Service Providers (LSP). They have classified digital lenders into three different groups. Firstly, those entities that are regulated by the Reserve Bank of India for lending business in itself.
Secondly, those entities authorized to carry out lending are based on the statutes and regulatory provisions of certain other bodies but are not managed by the RBI.
The third groups include those entities that are outside the purview of any kind of regulatory or statutory provisions.
All those lending groups that do not come within the discretion of the above-mentioned categories are free to formulate their own rules and regulations alluding to the recommendations of the working group.
What does the Guideline say?
Let's take a brief look into the highlighting aspects of the guidelines:
The guideline mandates that all digital transactions should be made between the bank accounts of the regulated entity and the borrower. It should not include any third party or pool account. When they say Regulated Entity, it means any banking or non-banking financial company.
With regard to the payment of fees during the credit intermediation process, the guidelines clarify that the payment is not to be made by the borrower but should be made by the Non-Banking Financial Companies (NBFCs) i.e, the regulated entities.
If at all there are any penal interest or charges, they are to be disclosed in the key fact statement (KFS) on an annual basis and should be based on the outstanding amount of the loan.
Data privacy is one of the most concerning thoughts in today’s digital world. The guidelines carefully address this issue by delineating that the usage of user information should be need-based. The digital lending platforms are barred from accessing the user’s files, contact lists, call logs, media, and other telephonic functions.
However, they can have one-time access to their camera and microphone to complete their KYC procedures. This will be possible only after the explicit consent of the customer. Additionally, the guideline also states that the user has the option to deny access to certain data, restrict disclosure of certain information to any third party and deny data retention. The user can also revoke the consent given later if they feel so. They can also delete the application and forget the data when it is being uninstalled or deleted.
While signing up, the digital lending platform needs to disclose the credit limit information related to product features and the related costs. It includes the disclosure of the all-inclusive costs of digital loans in the form of Annual Percentage Rates (APRs). The guidelines also prohibit these platforms from increasing the credit limit without the consent of the borrower.
Reporting Lending to CICs
Any form of lending carried out through Digital Lending Applications (DLAs) of RE or LSPs is to be reported to the Credit Information Companies (CICs) irrespective of their tenure or nature.
The guidelines extend these requirements even to those lending carried out through Buy Now Pay Later model. This is with regard to the provisions of the Credit Information Companies (CIC) Regulation Act, 2005, issued by the Reserve Bank of India at regular intervals.
Options to Exit Loans
The RBI guidelines give the user an option to exit the availed digital loan by paying only the principal and proportionate APR without paying any fine within a stipulated time called the cooling-off period or look-up period. The cooling-off time is determined by the boards of the respective regulating entities. Such a time period should not be less than three days for loans having a tenure of seven days or more and one day for loans having a tenure of fewer than seven days. For those borrowers, who continue even after this period, the provisions of pre-payment will be continued based on the extant RBI guidelines.
Every Regulated Entity (RE) and Lending Service Provider is required to appoint a grievance redressal officer. They are supposed to address the FinTech and Digital lending-related complaints issues, faced by the customers.
Apart from that, the issues related to one’s own Digital Lending Applications are also to be addressed by the officer. Apart from facilitating the option to lodge complaints, the contact details of the respective nodal grievance redressal officer have to be visibly displayed on the website of the regulated entity.
To further foolproof the grievance redressal system, RBI allows the user to file complaints through the Complaint Management System (CMS) portal under the Reserve Bank-Integrated Ombudsman Scheme (RB-IOS) in case the complaint is not resolved within 30 days of filing.
The development of technology services has tremendously contributed to the mushrooming of Digital Lending Services, which gained quick popularity among the young and middle-aged population alike. While such schemes have been helpful to a lot of people, it has also resulted in many unethical and fraudulent practices, wherein users get scammed.
Apart from that, various platforms also use this service as a way to charge exorbitant interest rates from users. It is in such a context that the guidelines released by the RBI become all the more relevant. There was a need to manage and control the proliferation of this budding service. These guidelines will ensure that lending through digital platforms happens responsibly wherein both the parties benefit from the advancement of fintech facilities.
When and where was RBI established?
The Reserve Bank of India was established on 1st April 1935, in Kolkata.
Where is the central office of RBI?
RBI headquarters is currently located in Mumbai after it was shifted from Kolkata in 1937.
Who is the current governor of RBI?
Shaktikanta Das is the present governor of RBI.
When did RBI release Guidelines for Digital Lending?
RBI released the Guidelines for Digital Lending in August 2022.