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Lenders may see rise in compliance costs: Digital lending norms to make industry responsible, cautious

“Unregulated entities or a small section of the loan apps that may be rogue players will have to course correct and legitimize the way they are transferring money, as the account will now have to be KYC’d and backed by a registered entity,” said Kunal Varma, CEO and co-founder of neo-banking platform Freo.

Digital lending apps operating without either a banking or an NBFC licence, will now be either forced to shut shop or suspend operations indefinitely until they are compliant with the new regulations.
Digital lending apps operating without either a banking or an NBFC licence, will now be either forced to shut shop or suspend operations indefinitely until they are compliant with the new regulations.

The Reserve Bank of India’s (RBI) guidelines for regulating digital lending platforms prescribe a more cautious regime for players. Analysts observe the regulations would require lenders to be a lot more careful in their partnerships with loan services providers (LSPs) and fintechs.

Digital lending apps operating without either a banking or an NBFC licence, will now be either forced to shut shop or suspend operations indefinitely until they are compliant with the new regulations.

“Unregulated entities or a small section of the loan apps that may be rogue players will have to course correct and legitimize the way they are transferring money, as the account will now have to be KYC’d and backed by a registered entity,” said Kunal Varma, CEO and co-founder of neo-banking platform Freo.

The restriction on access to mobile phone resources could require lenders and LSPs to explore other methods of assessing borrowers’ creditworthiness. The collaborative efforts would probably need a much longer time hereon to fructify into a meaningful relationship.

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Fintechs believe some guidelines, including handling the flow of loans from the lender to the borrower, the requirement to maintain clear audit trails of customer data collection, and providing transparency on annual percentage rates (APRs) applicable on loans, may slightly increase compliance costs.

Sugandh Saxena, CEO of Fintech Association for Consumer Empowerment (FACE), said the transition to the new regulatory regime will have its implication in terms of modifying how loans are disbursed and recorded.

“Adjusting the technical aspect (of origination and destination of loans), providing APR calculation (to consumers), and contract changes from lender to apps in the short term may increase some compliance costs. But this is how business has to be done in the country now as per the regulator, so that cost has to be factored in the model itself and it can’t be an excuse,” Saxena said.

The RBI has mandated that all digital loans must be disbursed and repaid through bank accounts of regulated entities only, without pass-through of loan service providers (LSPs) or other third parties. The regulator also mandated that any customer data collected by digital lending apps should be need-based, should have clear audit trails and should be only done with the prior explicit consent of the borrower.

Lizzie Chapman, co-founder and CEO, ZestMoney, pointed out that the digital lender will need to move some contracts from the registered tech company entity to the NBFC unit. “Anybody who has (dual company structure) with an NBFC and a tech company entity, now have quite specific guidelines to adhere to. Our registered NBFC is the lender; the tech company is the lending service provider. Now, we know specifically which can do what, so there may be some contracts we might have to move around with vendors, or some other NBFCs. But that is a small amount of paperwork, nothing major will change,” she added.

Those players who offer buy now pay later (BNPL) loans using the first loss default guarantee (FLDG) model need to wait for more guidelines. The central bank specified that regulated entities and lending apps that offer loans through this model must, by default, adhere to the ‘Master Directions’ issued under the Securitisation of Standard Assets Directions of September 2021. FLDG is a lending model wherein a third party insures or compensates a lender if the borrower defaults. Currently, the credit risk is borne by the digital lending platform although they don’t maintain any regulatory capital.

Chapman of ZestMoney said the RBI’s directive on the securitisation of loans is welcome, but the language says they’re looking into it, so it’s not immediately clear what that means.

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