Fintechs confident of meeting RBI deadline on digital loans but many face hurdles

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The fintech industry is confident of meeting the Reserve Bank of India’s (RBI) November 30 deadline of implementing new digital lending norms on existing loans but many firms face challenges in changing their existing business models and processes.

A clutch of fintechs and industry associations Moneycontrol spoke to said the timeline seems adequate for most digital lenders and lending service providers (LSPs) to re-align their processes for existing loans. However, an extension of the deadline by the regulator could be on the cards only if a significant chunk of digital lenders faces genuine challenges in re-orienting their systems and processes, they said.

"The RBI guidelines on digital lending are quite balanced and reasonable,” said Anuj Kacker, co-founder of personal loan and neo banking platform Freo, and vice-president of the Digital Lenders Association of India (DLAI).

The new norms restrict third-party role in the flow of funds from lenders to borrowers, address consent issues, increase disclosure of costs and raise data privacy, among others.

“Some players might have to tweak their offerings, but those who were running a completely non-compliant business have to shut shop,” added Kacker. “We do not think complying with these regulations will be a concern at large.”

“We believe the timeline is adequate for most digital lenders and service providers to re-align their processes and any extension will be provided only if a significant chunk of digital lenders are facing genuine challenges in re-orienting their systems and processes,” said Anubhav Jain, co-founder and chief executive officer at Rupifi, a fintech.

However, the guidelines will also force many fintechs in changing their existing business models and processes.

“There are some practical challenges with respect to borrower consent, data collection and usage recommendations,” said Rupify’s Jain. “Depending on the loan product and operating model of the lender or LSP, data required from borrowers could be different, as could be the third parties/service providers involved in the overall value chain.”

Jain said it will be a challenge to explain the usage and sharing criteria of different data points with borrowers without creating drop-off points in the on-boarding process. Further, re-engaging with existing borrowers and obtaining required consent will be an operationally intensive and time-consuming exercise, he said.

Not just that, generation and storage of the so-called Key Fact Statement (KFS), change of disbursals from LSPs’ account to directly in the account of the regulated entity, wherever not in place already, will need a decent amount of technology changes, said industry players. That could impact profitability and revenues, they added.

“Fintechs will have to bear the cost of compliance and may not be able to pass it on to the borrowers,” said Jasmeet Chhabda, senior vice president at Lentra. “In addition, fintechs will not be able to collect fees from borrowers and have no control over their capital flows. The regulated entities will have a dominant say on fees and charges.”

Moreover, the consent-driven use of borrower data will ensure that secondary services being provided by fintechs are restricted and therefore their additional revenue through these services, added Chhabda.

According to Kunal Jhunjhunwala, founder and managing director at airpay, the regulatory nature of bringing everything in-house will drastically increase costs, ushering in challenging times for fintechs.

“With interest rates on the rise, the cost of capital is rising, putting margins under pressure,” said Jhunjhunwala. “With this additional cost, margins will further get compressed.”

Although these are nascent challenges, fintech players seem confident that given only genuine players will be able to successfully comply with the RBI recommendations, the risk of losing customers to unscrupulous/non-compliant operators will reduce and increase customer stickiness with LSPs and lenders. This will help to improve profitability metrics at the customer level in the medium and long term, they said.

Under the norms released by RBI on August 10, all loan disbursals and repayments through the digital lending apps are to be executed only between the bank accounts of the borrower and the regulated entity without any pass-through or pool account of the LSP or any third party. Apart from that, all fees or costs to LSP are to be paid by the regulated entity and not the borrower.

Secondly, the RBI has mandated an upfront disclosure of all-inclusive costs via an annual percentage rate to the borrower. There is also a cooling-off period when a loan can be paid off to be part of the loan contract. Additionally, to protect data privacy, the RBI has said the data collected by DLAs should be need-based, have clear audit trails and be only done with the prior explicit consent of the borrower.

The RBI, on September 2, gave a breather to banks and fintechs by allowing them time till November 30 to implement the new digital lending guidelines on existing digital loans. The regulator, in the circular, asked regulated entities to put in place “adequate” systems and processes to ensure that existing digital loans sanctioned as on the date of the circular are also in compliance with these guidelines in both letter and spirit.

The fintechs Moneycontrol spoke to said the practice is already being followed and hence complying with the timeline would not be worrisome.

“At the onset, the timelines seem to be feasible, mainly because most of the legitimate operators (LSPs and DLAs) are already compliant with the guidelines provided,” said Nageen Kommu, founder and chief executive officer at Digitap. “Only a few of the foreign enterprise influenced operators would face the brunt of these changes.”

Sugandh Saxena, chief executive officer of the Fintech Association for Consumer Empowerment (FACE) concurred.

“As our members were already working in the regulatory space, we feel timelines are very reasonable and doable,” said Saxena. “Surely it means a lot of changes in underlying models, systems and processes. Yet as the industry matures and scales up, it is only fair that the industry follows a standard market conduct approach as per the regulations.”