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Missing the main player

The RBI norms extend to only the regulated entities, while unauthorised apps are the bigger problem

Missing the main player
The RBI Guidelines require that borrowers must be provided with a key fact statement containing information about fees, recovery mechanism and grievance redressal officer.

By Shehnaz Ahmed

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The Reserve Bank of India (RBI) recently released guidelines for the digital lending sector (RBI Guidelines). The guidelines seek to implement the recommendations of the RBI Working Group on Digital Lending (RBI WG), which was set up in 2021 against the backdrop of the rise of digital lending services and several consumer complaints received by the central bank (especially during the pandemic) against the unfair practices adopted by some lending platforms. While the RBI Guidelines provide regulatory clarity on how RBI-regulated entities (RBI REs) (such as banks and non-banking financial companies, or NBFCs) may partner with fintech companies to provide such digital lending services, it does not address some of the fundamental challenges facing the sector.

Currently, digital lending services are provided by RBI REs licensed to carry out lending activities (typically in partnership with fintech companies); entities authorised to provide lending under other laws (such as registered money lenders), but not regulated by RBI, and entities lending outside the purview of any law (unauthorised apps). The RBI WG notes that out of the 2,562 consumer complaints received by RBI (from January 2020 to March 2021), the majority pertain to digital lending applications promoted by entities not regulated by RBI. This includes non-bank non-financial companies, unincorporated bodies, and individuals. Notably, the RBI Guidelines apply to RBI REs only, thereby leaving out several entities providing digital lending services from regulatory oversight.

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From a legal perspective, it is understandably challenging for RBI to act against such unauthorised apps since it does not have jurisdiction over such entities. However, considering the horrifying stories reported regarding the unfair practices adopted by such unauthorised apps, there is much to be done to protect vulnerable customers.

The RBI Guidelines require that borrowers must be provided with a key fact statement containing information about fees, recovery mechanism and grievance redressal officer. In 2020 also, RBI had issued a circular (2020 Circular) containing guidelines for banks and NBFCs sourcing loans over digital lending platforms. The circular mandates both banks/NBFCs and digital lending platforms to disclose to customers the names of their respective partners for providing digital lending services.

However, in reality, the implementation of such disclosure norms is not inspiring. In many cases, digital lending platforms/apps and banks do not display such information conspicuously, which may mislead consumers regarding the entity with which it is interacting. In countries like the United Kingdom and Singapore, the financial regulator maintains an online register of licensed entities, thereby allowing customers to have access to a comprehensive database where they can confirm the regulatory status of entities with whom they are interacting. Vulnerable consumers often fall prey to unauthorised apps because of the lack of any credible means for consumers to verify the regulatory status of such apps.

An online register/database maintained by RBI which contains relevant information about licensed entities, services provided by them and their authorised partners will be useful to empower citizens when it comes to verifying the authenticity of digital lending apps. Even the National Payments Corporation of India lists the third-party apps operated by fintech companies (which are not regulated by RBI) along with concerned partner banks on its website.

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The RBI WG had also recommended setting up a self-regulatory organisation (SRO) for the digital lending sector,, which the RBI has now marked for further examination. The SRO model will introduce an element of discipline in the sector. Through the SRO, RBI may consider adopting a co-regulatory model for supervising lending service providers (LSPs) (i.e., fintech companies that partner with RBI REs to provide certain aspects of digital lending services but do not take the credit risk), which currently remain outside the direct regulatory remit. LSPs may be required to self-register with such SRO along with submission of relevant information. This will enable both RBI and the SRO to get a fair picture of the LSPs operating and examine if such LSPs are complying with regulatory prescriptions, such as the RBI Guidelines.

As mentioned above, there are many unauthorised apps which are currently not subject to any regulatory oversight. While consumers approach RBI for resolving their grievances against such apps, RBI has not taken any action against such entities owing to a lack of jurisdiction. The RBI Governor has recently indicated that such consumers may approach the local police. Even for other enforcement authorities (such as police, and the enforcement directorate, or ED), it may be challenging to take action against such entities in the absence of any credible source of information regarding such apps.

Therefore, it may be useful to create a coordinated mechanism between RBI, other financial sector regulators, and enforcement agencies such as the ED and police to track such consumer complaints, share information and take the necessary action. A common fraud registry for the financial sector may be considered where such information may be shared between relevant agencies to take criminal action against fraudulent unauthorised apps. When it comes to vulnerable consumers, who are often the target of such lending scams, it may be futile to expect them to understand issues relating to regulatory jurisdiction and approach the correct authority.

While the RBI Guidelines are a positive step toward protecting the interests of consumers, they will have to be supplemented with additional regulatory measures for empowering consumers and also better enforcement.

The writer is Fintech lead, Vidhi Centre for Legal Policy

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