Unregulated lending apps can no longer harass borrowers to make payments as the long-awaited and much-needed regulatory framework for digital lending has been released by the Reserve Bank of India, which addresses concerns over lending third parties, mis-selling, breach of data privacy, charging exorbitant interest rates and unethical collection practices.
The framework is based on the principle that lending activities can only be carried out by entities that are either regulated by the central bank or entities authorized to do so under any other law. Among the various measures, the regulation stipulates that an automatic increase in the credit limit without the explicit consent of the borrower is prohibited. Any fees or charges payable to the Lending Service Provider (LSP) as part of the credit intermediation process must be paid directly by the regulated entity (RE) and not by the borrower.
“We warmly welcome the recommendations of the RBI Task Force on Digital Lending – Implementation as a Framework for Digital Lending in India. These are long-awaited and much-needed guidance that will help support orderly growth in lending through the digital lending methods being revolutionized by Indian fintech players. Most directives have a direct impact on customers and do much to protect the interests of customers. For example, all loans obtained through digital means must be reported to CICs, regardless of their nature or duration. This will benefit all prudent consumers repaying their loans, including short-term consumer loans, by giving them a clear picture of their overall credit load. The standardized key information sheet for borrowers will increase transparency and make it easier for borrowers to understand what the loan entails,” says Adhil Shetty, CEO of BankBazaar.com.
The Reserve Bank had constituted a working group on “digital lending, including lending via online platforms and mobile applications” (WGDL) on January 13, 2021. The recommendation also states that “REs should ensure that they and the LSPs engaged by them will have an appropriate nodal grievance officer to handle complaints related to FinTech/digital lending.
This Grievance Officer must also handle complaints against their respective Digital Lending Applications (DLAs). The Grievance Officer’s contact information should be prominently displayed on the ER’s website, its LSPs and DLAs, as applicable. In accordance with current RBI guidelines, if a complaint filed by the borrower is not resolved by the ER within the specified time (currently 30 days), he/she may file a complaint with the Reserve Bank – Integrated Ombudsman Scheme .
Saurabh Puri, Commercial Director, Credit Cards, Zaggle said, “Digital lending apps powered by Fintechs and regulated entities have brought innovation to the financial system. Digital lending apps use the power of data and technology capabilities to make the borrowing customer experience seamless. Lenders and borrowers benefit from transparent customer acquisition, credit scoring, loan approval, disbursement, repayment and customer service. However, some concerns have emerged, including breach of data privacy, unfair business conduct, charging exorbitant interest rates, and unethical recovery practices. RBI’s directive on digital lending is a step towards alleviating these concerns. At Zaggle, we believe these guidelines will bring transparency and build customer confidence. The guidelines also delineate the roles and responsibilities of regulated entities and language service providers. Overall, it will help the industry develop in an orderly manner; while encouraging innovation.
Gaurav Chopra, Founder and CEO of IndiaLends, said: “Issues related to lack of transparency, data protection and privacy, and user consent have been contentious issues, and these are precisely the issues that we have sought to address from the start. We are pleased that there is a knowledgeable working group that understands consumer issues as well as the digital lending landscape. They have given a fair set of recommendations, which the RBI has This will only strengthen consumer confidence in the credit system and allow players like us to continue in business without any changes to the business model.”
What changes for fintechs after the standards? How will the approved standards help them? The expert says it is akin to the early years of the Unit Linked Insurance Scheme (ULIP), when lack of regulation led to unsound practices such as exorbitant commissions, giving the industry a bad reputation. Once regulated, ULIPs were generally accepted as an investment instrument, which resulted in healthy growth.
“From a fintech perspective, this is a positive move that provides clear visibility into the facets that RBI has already planned as well as the aspects that need consideration. This will increase borrowing acceptance via non-traditional channels that provide quick and efficient access to credit. This will also increase acceptance among the unorganized sector and for regulated “buy now, pay later” products. In addition, regulation will help channel the disruptive nature of fintechs while regulating its risks. Direct lender-borrower interaction through the elimination of pooled accounts will make fintechs more acceptable in the market,” says Sanjay Kao, Executive Vice President Asia-Pacific (APAC) at Lentra, who offers banks an instant loan solution.
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