Will RBI’s digital lending rules change the way loans work? | The Financial Express

Will RBI’s digital lending rules change the way loans work?

The new digital lending rules by RBI will apply to both the existing digital loan customers and the new customers who will apply for a digital loan in the future.

Will RBI’s digital lending rules change the way loans work?
The new rule on digital lending will make the entire process more transparent, reliable and trustworthy for borrowers.

The Reserve Bank of India (RBI) has laid a new framework on digital lending, and regulated entities are in the process of complying with the new guidelines by November 30, 2022. The new rules will apply to both the existing digital loan customers and the new customers who will apply for a digital loan in the future.

Before we look at the impact of the new digital lending rules by the RBI on the digital loan market, let’s first understand the difference between the digital and the offline lending process.

Digital Lending Vs Offline Lending

Under the offline lending process, the borrower must visit the lender’s branch and apply for the loan using the physical form. The lender approves the loan after completing the due diligence process. It usually takes lots of time, and the borrowers are usually confined to taking a loan only from lenders available near them. It is often difficult to compare the loan from different lenders in the offline process. On the other hand, digital lending allows a borrower to apply for a loan using the lender’s online platform. The process is often easy, quick, convenient, and paperless.

Offline lenders usually involve banks and NBFCs, whereas the digital lending process may also involve a lending service provider (LSP) that usually provides the digital lending platform.

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How Will New Rule Impact Loan Process?

It was noticed that some LSPs were involved in problematic lending practices, such as allowing credit much higher than the borrower’s repayment capacity. Questions were also raised related to the security of borrowers’ data. So, the RBI introduced new rules to streamline the process and ensure better security in the digital lending process. The purpose seeks to eliminate the unethical practices and bring unregulated third parties into its purview.

Under the new digital lending rule, only essential data will be allowed to be collected from the borrower with their prior consent, and then if required, it can be audited later. Now, there would be a requirement for a nodal grievance officer to address the complaints related to digital lending or the fintech company involved in the lending process. The charges involved in the digital lending process must be between the LSP and the bank. These charges cannot be demanded from the borrower. All lending including Buy Now Pay Later (BNPL) will now have to be reported to the Credit Information Companies (CIC).

Transparent Digital Lending

The new rule on digital lending will make the entire process more transparent, reliable and trustworthy for borrowers. It will lead to healthy competition among digital lenders. Now, the banks/NBFCs and the LSP are expected to increase their focus on working for a better customer experience to increase the digital lending business.

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Soumee Bhatt, General Counsel, Bankbazaar.com, says, “RBI is mandated to regulate credit in India. It has always encouraged innovation in the financial system, products and credit delivery methods while ensuring orderly growth, preserving financing stability and protecting depositors’ and customers’ interests. The digital lending space is garnering attention owing to multiple reasons. To streamline the space, the apex bank has laid down these guidelines to mitigate risks and carve out a path of growth for the digital lending ecosystem in the country.”

Digital lending seeks to create a way for the financial inclusion of those at the bottom of the pyramid in India’s financial system.

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