RBI Digital Lending Guidelines: Key Takeaways For Consumers

The Reserve Bank of India on Wednesday issued policy guidelines for digital lending platforms detailing technology, data and regulatory frameworks, and consumer protection measures. 
 
These guidelines were issued keeping in mind the need to “support orderly growth of credit delivery through digital lending methods while mitigating regulatory concerns.”
 
It was found in the past that there were many complaints by consumers that digital lending apps were charging exorbitant interest rates or they were committing fraud, among others. 

Shilpa Mankar Ahluwalia, partner and head of FinTech division, Shardul Amarchand & Mangaldas and Co, a law firm, said in a statement, "the regulatory framework on digital lending issued by the RBI has a clear consumer protection focus. Non-transparent costs, unauthorised use of personal data and poor grievance redressal processes are some of the key risks that the RBI has sought to address."

Hence, the RBI constituted a working group on 'digital lending, including lending through online platforms and mobile apps, on January 13, 2021, to investigate the complaints. The central bank accepted some of the working group's recommendations and kept aside some of the changes and guidelines it suggested for further study.

Ajay Chaurasia, VP of Business, Product and Marketing at RupeeRedee, a digital financial services company, said in a statement, "overall, RBI has taken a strict action against unauthorised lenders in market. This is for protecting the consumers from frauds, loan traps, harassment and data protection. These guidelines will structure the digital lending ecosystem and will eliminate the illegitimate Apps from market." 

These new rules apply only to RBI-regulated entities (RE) and lending service providers (LSP).

Here Are Some Of The Consumer Centric Guidelines:

●    Transparent Loan Execution/Disbursals: The RBI said that all regulated entities (RE) will have to make sure that “all loan servicing, repayment, etc., shall be executed directly in their bank account, without any pass-through account/pool account of any third party.” Hence, from now onwards, every loan disbursement shall be made into the borrower’s bank account. 

However, there are certain exceptions. The RBI said that in the only case where exceptions “would be considered for disbursals covered exclusively under statutory or regulatory mandate, flow of money between REs for co-lending transactions, and disbursals where loans are mandated for specified end-use as per regulatory guidelines of RBI or any other regulator.”

The RBI also said that it shall be the duty of REs to ensure that any fees or other payments payable to lending service providers (LSPs) are "paid directly by them (REs) and are not charged by LSP to the borrower directly."

Ahluwalia further added that these rules stand out in the respect that only the licensed lender (bank or NBFC) can handle consumer funds; there can be no data over-reach; only data that is needed for purposes of the loan can be accessed in each case with clear consumer consent and "all costs charges and interest rates must be clearly disclosed as an annualised percentage rate to the borrower before loan disbursement. "Consumers will clearly benefit from these rules."

●    Cost of The Loan and Other Details Must Be Disclosed: The RBI said that "borrowers must be provided with a 'standardised key fact statement (KFS)' "before executing the loan contract. And this statement will also contain information regarding the "all-inclusive cost of digital loans as an Annual Percentage Rate (APR)," which must be mandatorily disclosed by REs.

“REs will provide a Key Fact Statement (KFS) to the borrower before the execution of the contract in a standardised format for all digital lending products,” said the RBI.
 
The RBI also said that “fees, charges, others, not mentioned in the KFS cannot be charged by the REs to the borrower at any stage during the term of the loan.”
 
The bank further said that the KFS would have details of APR, terms and conditions of recovery mechanism, and grievance redressal officer, specifically designated to deal with digital lending/Fintech-related matters, cooling-off/ look-up period, and other necessary information.
 
“This will allow greater transparency as consumers will know the effective cost of the loan. Lenders offering short-term loans with a fixed fee and marketing a low sticker rate will have to disclose the effective rate to the end consumer,” said Ankit Mehra, CEO and co-founder of GyanDhan, a financial services company based in Delhi.

●      Grievance Redressal Mechanism: The RBI said that the REs should ensure that they and the LSPs engaged “shall have a suitable nodal grievance redressal officer to deal with FinTech/ digital lending related complaints/ issues raised by the borrowers. Such grievance redressal officers shall also deal with complaints against their respective DLAs.”
 
Regarding how consumers should get the nodal grievance redressal officer’s contact details, the RBI said, “contact details of such officers shall be displayed on the website of the RE, its LSPs and DLAs prominently and also in the KFS provided to the borrower. 
 
The RBI said that if the borrower lodges any complaint that the RE does not resolve within the stipulated period (currently 30 days), then the petitioner can lodge a complaint on the management system (CMS) portal or other prescribed modes under the Reserve Bank Integrated Ombudsman Scheme (RB-IOS).  
 
“It is reiterated that responsibility of grievance redressal shall continue to remain with the RE,” said the RBI.

Nageen Kommu, CEO, Digitap, a tech company providing AI-driven solutions for the banking industry, said in a statement, that these "guidelines will certainly contribute towards safeguarding customer data, by imparting required degree of power in the hands of the customers. We believe the RBI’s norms are encouraging for the legitimate stakeholders in the digital lending ecosystem."

•    No Automatic Raising of Loan Limits And Loan Cooling-off Period: The RBI said that all REs shall ensure that “automatic increases in credit limits are prohibited unless explicit consent of the borrower is taken on record for each such increase.” 
 
“This (no automatic increase in credit limit) will ensure that consumers are not getting into debt traps due to ignorance. Individuals are only taking additional credit consciously. This might negatively impact growth for some companies but will be beneficial for the end consumer,” added Mehra.
 
The RBI said that a cooling-off/ look-up period as determined by the Board of the respective RE should be “given to borrowers for exiting digital loans in case the borrower decides to not continue with the loan during that period, by paying the principal and proportionate APR without any penalty. “
 
And for those borrowers who will continue with the loan, “even after the look-up period, pre-payment shall continue to be allowed as per extant RBI guidelines on the matter,” said the RBI.  
 
Amit Das, CEO and co-founder of Think360.ai, a data science company, said that the availability of a look-up period helps the customer repay the principal and apportioned APR without having to pay a pre-payment penalty or pre-closure charges.
 
“For instance, if you realise that you are being overcharged or that your loan terms are unfavourable, it makes the cost of switching much lower than what some of the digital lending platforms may be charging today,” he added.

● Mandatorily Reporting of Loan To Credit Bureau: The RBI said that all “REs to ensure that any lending done through DLAs is reported to CICs (credit information companies) irrespective of its nature/ tenor.”
 
Das said this “will help clamp down on customer grievances due to impersonation or fake loans.”  

Satyam Kumar, CEO and co- founder, LoanTap, a fintech company, said in a statement, "This regulation is a small step towards recognition of Fintech as an industry.  We welcome every aspect of issued guidelines, which will create the base to build a digital india."