RBI has come out with guidelines for the regulation of Digital Lending. The new regulations have been issued in the wake of rising number of illegal apps through which loans are disbursed in India. The rise of such illegal apps has hurt consumers in form of higher interest rates, unethical recovery practices etc. Further, unregulated, and unchecked growth of such apps could undermine financial stability of Banks & NBFCs.
Digital lending ecosystem in India
- Digital lending refers to online disbursal of loans where all processes such as credit assessment, including loan approval and recovery, take place remotely, typically through mobile apps.
- Digital lending ecosystem is dominated by Banks, NBFCs and loan service providers. The loan service providers may be categorized into two types:
- Entities regulated by financial sector regulators such as credit information companies, NBFC-Peer to Peer Lending Platform (NBFC-P2P) regulated by RBI; and credit rating agencies regulated by SEBI.
- Entities not specifically regulated by any financial sector regulator.
RBI guidelines on Digital lending
- Regulated Entities (Res) on which these regulations will apply: All Commercial Banks, Cooperative Banks, NBFCs (including Housing Finance Companies).
- Digital Lending Apps/Platforms (DLAs): Mobile and web-based applications with user interface that facilitate digital lending services. DLAs can be apps developed by Res or those operated by Lending Service Providers (LSPs) engaged by REs for extending credit.
- Lending Service Provider: They act as agents of REs who carry out some functions on behalf of RE such as Customer acquisition etc.
- Definition of Digital Lending: A remote and automated lending process, largely by use of seamless digital technologies for customer acquisition, credit assessment, loan approval, disbursement, recovery, and associated customer service.
- Responsibility of Regulated Entities: REs to ensure that all loan servicing, repayment etc. to be executed by borrower directly in the REs bank account without third party account. Disbursement shall be made into bank account of borrower except in some exceptional cases.
- Collection of fees/charges:
- Any fees, charges payable to LSPs will be paid by REs to them and not charged by LSP from the borrower.
- Customers will be charged Annual Percentage Rate by REs which is the effective rate charged to the borrower of a digital loan.
- APR shall be based on an all-inclusive cost and margin including cost of funds, credit cost and operating cost, processing fee, verification charges, maintenance charges, etc., and exclude contingent charges like penal charges, late payment charges, etc.
- Grievance Redressal: Suitable nodal grievance redressal officer to deal with FinTech/digital lending related complaints.
- Credit worthiness: Banks and NBFCs should capture the economic profile of borrower and assess borrower’s creditworthiness in an auditable way.
- Mandatory disclosures: Loan provided through Digital lending apps should be mandatorily reported to Credit Information Companies (CICs).
- Regulated Entities (REs) with a Lending Service Provider (LSP)/ Digital Lending App (DLA) does not diminish the REs’ obligations and they shall continue to conform to the extant guidelines on outsourcing.
- The REs are advised to ensure that the LSPs engaged by them and the DLAs (either of the RE or of the LSP engaged by the RE) comply with the guidelines contained in this circular.
- Note: EMIs on credit cards will not come under Digital Lending rules. However, loan products not covered under Credit Card directions of RBI will be under these rules.
Models of Digital lending
- Balance sheet lending (BSL) Model: Lend from their own balance sheets and hence carry credit risk.
- Ex. Banks and NBFCs.
- Marketplace lending (MPL) Model: Do not lend their own money & hence do not carry credit risk. E
- P2P lending platforms which bring together lenders and lenders through an online platform. Ex: Faircent, Lendenclub, Cashkumar etc.
- Fintech companies which enter partnership with Banks and NBFCs to extend loans.