Lenders better behave or the consumer pipeline will close

The RBI’s digital lending guidelines mandate lenders to provide borrowers with a comprehensive key fact statement for all digital lending products.

Right after Diwali, the Reserve Bank of India barred Bajaj Finance from lending under its “eCOM” and “Insta EMI Card” products.

If the regulatory decision had been announced a fortnight earlier, it would have dented the finance entity’s business during the peak festive shopping season.

The RBI said on its website on November 15 that the action was taken due to non-adherence of its digital lending guidelines, especially the non-issuance of key fact statements to borrowers under the lending products and deficiencies in key fact statements issued in respect to other digital loans sanctioned by the company. One should probably expect more regulatory action because the RBI said that other products also had "deficiencies" in their key fact statements.

This was the first time that the RBI used digital lending guidelines to impose customer-onboarding restrictions of a large entity. The RBI’s digital lending guidelines, released in September 2022, mandate lenders to provide borrowers with a comprehensive key fact statement for all digital lending products. This statement should encompass information on the annualised rate charged to the borrower of a digital loan, the recovery mechanism, details of the grievance redressal officer, and more.

Key Message

This was a clear message to lenders: that size and scale do not matter, and that they must follow rules and regulations. Action against a large errant sends a message down the industry.

Such supervisory restrictions do not rule out imposition of future penalties against the company. Also, going by similar regulatory restrictions in the past, it could take anywhere from nine to 18 months for this action to be revoked.

As a parallel, one should keep in mind the discomfort of the regulator in the increasing levels of consumer loans/unsecured lending by banks and non-banking finance companies. As expected by observers, the RBI also increased the risk weightages for consumer loans.

The main lesson from the recent RBI action is: Treat thy consumers with respect.

Transparency in communication with borrowers is another critical lesson to be gleaned from this incident. Clear and comprehensible terms and conditions, along with transparent disclosure of interest rates and fees, are essential to build trust with customers and avoid regulatory pitfalls.

Moreover, this episode highlights the need for continuous monitoring and self-assessment by digital lenders. Regular audits of lending practices and adherence to compliance standards are vital to identifying and rectifying deviations promptly.

The key takeaway for other digital lenders lies in the importance of robust risk management systems and a thorough understanding of the regulatory landscape. As the digital lending ecosystem continues to evolve rapidly, institutions must remain agile and stay abreast of regulatory updates to ensure compliance.

The current state of digital finance regulations can be considered just the initial step on a path that is yet to be fully paved. Rapid advances in technology present both opportunities and challenges, prompting regulators to adapt and refine their guidelines to keep pace with the evolving nature of the sector.

This journey is akin to traversing the road less traveled. Challenges will range from data privacy concerns to the need for robust cybersecurity measures. Regulators, in their quest to safeguard the interests of consumers and maintain the integrity of the financial system, will inevitably iterate and enhance their regulatory frameworks.

Consumer Rights

As the RBI scales up its own regulations around digital finance, these supervisory actions do well to assure consumers of their rights. The size of the finance brand or its legacy won’t matter in the regulatory supervisory process. Transparent dealings between lenders and consumers are not only a moral obligation but also pivotal in maintaining the integrity of the financial sector.

The RBI's commitment to acting firmly extends beyond consumer transactions to encompass the broader space of consumer interactions, including addressing intrusive cold calls, something that lenders like Bajaj have been known for. Memes on social media that describe the pain of being at the receiving end of their cold calls might not make them a cool brand anymore.

Also, a key lesson is that having a battery of ex-regulators on the advisory bench won’t solve for actual operational compliances or present-day regulatory dealings.

Those tracking specific brands would remember their memorable words a few months ago, when asked in a presser about such cold calls. The answer was icy at best. Recognising that such practices not only irritate consumers but also erode trust, the RBI could take up these issues with decisive regulations around cold calls too.

But one must keep in mind that the do-not-disturb system of the telecom regulator has been a failure in stopping such junk calls. Upholding consumer rights is not merely a regulatory mandate; it is a proactive step toward fostering a culture of respect, fairness, and accountability that ultimately strengthens the bond between financial institutions and the consumers they serve.

(Disclosure: The views are personal observations and not attributable to any organisation. The author is an independent director of the Fintech Association for Consumer Empowerment, which is an SRO-aspirant for the digital lending sector)

Srinath Sridharan is a policy researcher and corporate advisor. X: @ssmumbai. Views are personal, and do not represent the stance of this publication.