The Reserve Bank of India (RBI) introduced guidelines to regulate digital lending in September 2022. Addressing the guidelines recently Central Bank released answers to FAQ to provide clarification on the industry concerns.
With digital lending now becoming more commonplace, it is important that everyone involved in the process is aware of the guidelines and clarifications issued by RBI. This article will discuss the key points from these clarifications and how they will impact digital lending in India.
A high level glance
- Digital Lending Apps/Platforms (DLAs) are mobile and web-based platforms for digital lending.
- Regulated Entities (RE) such as banks and NBFCs are required to provide a list of DLAs and Loan Service Providers (LSPs) on their website and inform borrowers of the specifics of the LSP serving as a recovery agent.
- Regulated Entities (RE), such as banks and NBFCs, are required to provide a list of DLAs and Loan Service Providers (LSPs) on their websites.
- Data Protection: LSPs/DLAs must not store personal information of borrowers except some basic minimal data, and explicit consent must be taken from the borrower.
- Customer Protection: LSPs must have a grievance redressal officer to address complaints on digital lending, and explicit consent must be obtained before credit limit increase.
- Annual Percentage Rate (APR): The effective interest rate charged to the borrower, including all costs and fees.
- Cooling off/look-up period: A time window for borrowers to exit digital loans.
- Loan Disbursal, Servicing and Repayment: Disbursements and repayments should happen directly between RE bank account and borrower bank account.
- Collection of Fees and charges: Fees/charges payable to LSPs must be paid directly by REs and not charged to the borrower.
- Disclosures to Borrowers: APR, fees, and recovery mechanisms must be disclosed upfront in the Key Fact Statement (KFS).
- Digitally Signed Documents: Documents are automatically sent to the borrower upon execution of the loan contract.
Recent Clarifications Provided by RBI:
- A lending transaction will fall under the definition of digital lending even if some steps are carried out in physical mode.
- Reasonable one-time processing fee collected during loan processing need not be refunded if the borrower exits the loan during loan cooling-off period.
Loan Service Provider:
- Outsourced service providers providing activities that are listed under digital lending guidelines (i.e.: Customer acquisition, underwriting support, pricing support, servicing, monitoring, recovery of specific loan) will be classified as LSP. Any other service providers need not be categorised as LSP.
- Only customer/borrower facing LSPs need to appoint a nodal Grievance Redressal Officer. REs will have final responsibility in resolution of complaints.
- LSPs cannot directly or indirectly involve in the fund movement between RE and borrower (for disbursement, repayment) except in case of recovery agents acting as LSPs who are involved in collection of delinquent accounts. Even in this case, LSPs should not directly collect the charges from the borrower for collection service provided. REs should try to collect the delinquent amount from borrowers directly.
Annual Percentage Rate:
- For floating rate loans, APR may be disclosed at the time of origination based on the prevailing rate, and the revised APR should be disclosed via SMS/e-mail each time the floating rate changes.
- Insurance charges relating to loan product should be considered for the computation of APR.
Key Fact Statement (KFS):
- Penal charges on cheque bounce/mandate failure cases must be treated on per occurrence basis and must be clearly mentioned in KFS.
- Processing fee should be clearly mentioned in KFS.
- Both APR and annualised interest rate should be mentioned distinctly in KFS.
- Empanelled agent details for loan recovery should be mentioned in KFS. On loan turning delinquent, appropriate loan recovery agent details should be communicated to borrower through email/SMS.
- In case of co-lending transaction, where direct bank account transfer between REs and borrower is not possible of (as 2 REs are involved in co-lending), already exemption has been provided. This is applicable for both Priority Sector Lending (PSL) loans and non-PSL loans.
- In case of loan repayment on salary loans where employer deducts the loan amount from employee salary, the employer must directly credit the RE’s bank account without any interference/intermediation of LSPs.
We believe that in coming days, RBI will provide more clarifications on the digital lending guidelines which will eventually result in wider acceptance and adoption.
Author: Sriram Ganesan | AVP, Product and Pre-sales
Sriram is a certified PMP and CAIIB professional having more than 16 years of experience in the banking domain that spans into operations, business analysis, project management and presales. He has involved in largescale implementation of leading banking solutions with in-depth exposure to lending domain. He comes with overall experience ranging from retail and corporate banking, payments and investment banking.
Sriram has recently joined Craft Silicon as a product manager.