With the innovative methods of designing and delivery of credit products and their servicing through the Digital Lending route acquiring prominence, certain concerns have also emerged which, if not mitigated, may dent the confidence of people in the digital lending ecosystem.
Some of the key concerns are related to engagement of third parties, mis-selling, charging of exorbitant interest rates, unfair business conduct, unethical recovery practices, breach of data privacy, etc.
To ensure protection of depositors’ and customers’ interests, the Reserve Bank of India (RBI), in its guidelines issued to all commercial banks, primary (urban) co-operative banks, state co-operative banks, district central co-operative banks and NBFCs (including housing finance companies), has reiterated that the obligations of Regulated Entities (REs) don’t get diminished by entering into outsourcing arrangements with a Lending Service Provider (LSP)/ Digital Lending App (DLA) and the REs shall continue to conform to the extant guidelines on outsourcing.
Among other instructions, the RBI issues guidelines on the following issues:
Annual Percentage Rate
As per the guidelines, the lenders must make the borrowers aware of the Annual Percentage Rate (APR), which is the effective annualised rate charged to the borrower of a digital loan. The cost and margin including cost of funds, credit cost and operating cost, processing fee, verification charges, maintenance charges, etc should be included in APR, while contingent charges like penal charges, late payment charges, etc should be excluded.
In its guidelines, the RBI has instructed the REs to ensure that all loan servicing, repayment, etc., shall be executed by the borrower directly in the RE’s bank account without any pass-through account/ pool account of any third party. Except for disbursals covered exclusively under statutory or regulatory mandate (of RBI or of any other regulator), the disbursements shall always be made into the bank account of the borrower. The REs shall also ensure that in no case, disbursal is made to a third-party account, including the accounts of LSPs and their DLAs, except as provided for in the RBI guidelines.
REs shall have to ensure that any fees, charges, etc, payable to LSPs are paid directly by them (REs) and are not charged by LSP to the borrower directly.
Penal Interest/ Charges
REs should also ensure that the penal interest/charges levied, if any, on the borrowers shall be based on the outstanding amount of the loan. It also has to be ensured that the rate of such penal charges are disclosed upfront on an annualised basis to the borrower in the Key Fact Statement (KFS).
Cooling off/ Look-up Period
Like insurance companies, REs should also provide the borrowers a cooling off/ look-up period, that is a time window shall be given to borrowers for existing digital loans, to cancel a loan agreement, in case a borrower decides not to continue with the loan.
“The regulations around user consent for storage and usage of personal data are a welcome move. They are in line with global standards such as the GDPR, and our Draft Personal Data Protection Bill that was tabled in the Parliament in 2019. By asking DLA and LSPs to comply with these rules with immediate effect, the RBI is ensuring the financial services and fintech ecosystem stays ahead of the curve in protecting sensitive personal data, even before it is mandated by law. This will create immense consumer trust in the ecosystem,” said Anurag Reddy – Vice President of Product and Chief of Staff, Dinero.
Dr Ravi Modani, Founder & CEO at 121 Finance said, “Regulation towards a brighter, more trustworthy future for all parties involved – whether it is the lender or the borrower, or LSPs. The regulation and guidelines of Digital Lending through online platforms and mobile phones have brought in a sense of security and faith amongst the lenders and the borrowers.”
“With the issuance of the circular mandating all REs to take charge and be accountable for every transaction, the foul practices will automatically get eradicated from the system, making it fitter for lending transactions that are clean in nature. It now covers compliance for banking, housing, credit as well as factoring. The RBI has also defined the relationship of LSP with RE and made RE responsible for the conduct of LSP, which will safeguard the eventual borrower from all harassment,” he added.
“RBI has covered Factoring Regulation Act in this which is a welcome move for a digital factoring company like us,” Dr Modani further said.