The Reserve Bank of India on August 10 released norms to regulate digital lending to crack down on the growing number of frauds and unlawful activities.
All loan disbursals and repayments have to be executed only between the bank accounts of the borrower and the regulated entity without any pass-through or pool account of the lending service provider (LSP) or any third party, the regulator said.
Any fees or charges payable to LSPs in the credit intermediation process shall be paid directly by the regulated entity and not by the borrower.
The RBI had in January 2021 set up a working group to study issues regarding digital lending and suggest regulations.
In November, the working group proposed stricter norms for digital lenders, including subjecting the digital lending apps to a verification process by a nodal agency to be set up in consultation with stakeholders. It also suggested a self-regulatory organisation covering the participants in the digital lending ecosystem.
While the RBI has accepted a few of the regulations, some, accepted in principle, require further examination, the RBI said in the August 10 release.
Some recommendations require wider engagement with the government and other stakeholders in view of the technical complexities, setting up of institutional mechanisms and legislative interventions, said the regulator.
Classification
Digital lenders are classified into three categories. The first are those entities regulated by the RBI and permitted to carry out lending business. Second are those entities authorized to carry out lending as per other statutory or regulatory provisions but not regulated by RBI. The third category includes those entities lending outside the purview of any statutory or regulatory provisions.
The RBI has classified digital lenders into three categories. The first are those entities regulated by the RBI and permitted to carry out lending business.
The second are the entities authorised to carry out lending as per other statutory or regulatory provisions but not regulated by the central bank.
The third bunch will include those entities lending outside the purview of any statutory or regulatory provisions.
A standardised Key Fact Statement (KFS) must be provided to the borrower before executing any loan contract, the RBI said.
Entities will also have to disclose the all-inclusive cost of digital loans in the form of an annual percentage rate (APR), which will be a part of the KFS.
Any automatic increase in the credit limit without the explicit consent of borrower is prohibited, the regulator said. A cooling-off or look-up period during which borrowers can exit digital loans by paying the principal and the proportionate APR without any penalty shall be provided as part of the contract.
To address consumer complaints, regulated entities shall ensure that they and the LSPs engaged by them have a suitable nodal grievance redressal officer.
This officer shall also deal with complaints against their digital lending mobile apps. The details of the officer are to be prominently indicated on the website of the regulated entity, its LSPs and on digital lending apps (DLA), as applicable, the regulator said.
Other key recommendations accepted by the RBI are as follows:
- If a complaint lodged by the borrower is not resolved by the regulated entity within the stipulated 30 days, they can complain to the Reserve Bank – Integrated Ombudsman Scheme.
- Data collected by DLAs should be need-based, have clear audit trails and be only done with the prior explicit consent of the borrower,
- Option may be provided for borrowers to accept or deny consent for the use of specific data, including the option to revoke previously granted consent, besides an option to delete the data collected from borrowers by the DLAs or LSPs.
- All new digital lending products extended by regulated entities over merchant platforms involving short-term credit or deferred payments are required to be reported to credit information companies.