Putting in place strict norms to curb rising malpractices in the digital lending space, the Reserve Bank of India (RBI) has announced a slew of measures. Among the measures, it mandated that digital loans must be credited directly into the bank accounts of borrowers and not through any third party. Here’s what are the new RBI norms and why the central bank has introduced them:
What Are The Rules?
As per the norms, the RBI has prohibited the automatic increase in credit limit without the explicit consent of borrowers. Digital lending entities and not the borrowers should pay fees or charges payable to lending service providers (LSPs) in the credit intermediation process.
All loan disbursals and repayments are required to be executed only between the bank accounts of borrower and the regulated entity without any passthrough/ pool account of the LSP or any third party.
A standardised key fact statement (KFS) must be provided to the borrower before executing the loan contract. All-inclusive cost of digital loans in the form of annual percentage rate (APR) is required to be disclosed to the borrowers and APR will also form part of KFS.
A cooling-off/ look-up period during which the borrowers can exit digital loans by paying the principal and the proportionate APR without any penalty shall be provided as part of the loan contract.
Regulated entities must also ensure that they and the LSPs engaged by them shall have a suitable nodal grievance redressal officer to deal with fintech/ digital lending-related complaints. Such grievance redressal officer shall also deal with complaints against their respective digital lending apps (DLAs).
As per extant RBI guidelines, 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.
Data collected by DLAs should be need based, should have clear audit trails and should be only done with prior explicit consent of the borrower.
Why Have These Norms Been Introduced?
The norms have been introduced as concerns arose over business conduct and customer protection amid a spurt in digital lending. It also aims to prevent illegal digital lending activities. RBI Governor Shaktikanta Das has in the past also talked about bringing in such regulations.
In January 2021, the RBI had set up a working group to study issues around digital lending apps and suggest regulations. In November 2021, the working group proposed stricter norms for digital lenders, including subjecting digital lending apps to a verification process by a nodal agency to be set up in consultation with stakeholders.
Lizzie Chapman, CEO & co-founder of ZestMoney and president of Digital Lenders’ Association of India (DLAI), said, “ZestMoney welcomes the digital lending guidelines announced by the RBI. We see these guidelines as extremely positive measures for customers and thereby fintech companies who follow industry best practices. Specific to digital lending, we also believe the guidelines make it abundantly clear that India will not be a market where regulatory loopholes can be exploited to build businesses.”
Madhusudan Ekambaram, CEO & co-founder of KreditBee, said, “The issuance of the RBI’s new norms is a crucial development in improving the digital lending regulation bid and is a welcome step towards ensuring fairness and transparency in the entire digital lending ecosystem. Legitimate players have already been adhering to these guidelines and would continue to refine the operations further to strengthen our existing transparent and fair practices and customer trust in the digital lending ecosystem to ensure a healthy and sustained growth of the sector.”
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