RBI’s New Digital Lending Guidelines

Reserve Bank of India (RBI) has announced guidelines for digital loans. The central bank has given regulated entities (REs) until November 30 to put in place adequate systems and processes to ensure that “existing digital loans” comply with the new lending guidelines. The new guidelines apply to both “existing customers” using loans and “new customers” which are joining. They came into effect today. In this article, let us have a look at the RBI’s new digital lending guidelines: Protecting the interest of borrowers.

Importance of RBI’s New Digital Lending Guidelines

The regulator must protect consumer rights as customers move from ‘new to credit’ to New to digital. Many naive digital users have taken advantage of too many illegal shops and digital loan apps that are not registered with RBI.
Customers are usually unaware that they are waiving their privacy rights when they accept the terms of service of unregulated platforms. This allowed such illegal lending apps to collect users’ entire phone contacts, media, galleries, etc. and decided to use it to harass borrowers and their contacts in case of late payments.

Hence, RBI’s main purpose for introducing its digital lending guidelines is to reduce consumer fraud. RBI’s decision will increase accountability and transparency for lenders and enforce consumers’ privacy rights.

What does this mean for borrowers?

These much-awaited RBI guidelines on digital lending provide much-needed clarity on regulatory practices, protection of customer interests, and responsibilities of stakeholders in digital lending. Also, digital lending will no longer be just a technology-based convenience model. Rather, it would evolve as a multi-layered system thriving on the core foundations of banking, putting customer interest first and providing easier access to organized credit with increased transparency.
RBI’s new digital lending norms will protect borrowers’ interest by ensuring that their credit transactions are through apps that are compatible and transparent.

The provision to appoint a nodal grievance redressal officer will also further protect borrowers and help them file complaints on an ongoing basis. Customer data protection will also be strengthened by ensuring that digital lenders provide their customers with options to accept, decline, or consent to requests for access to their information, limiting it to only the specific information required for the loan.

Borrowers must be provided with important information

• During the registration/onboarding phase, borrowers must be provided with information about product features, credit limits, prices, etc.
• The list of digital lending apps and service providers with whom banks and NBFCs have tied up must be published on their websites.
• It is required that information about the nodal grievance redressal officers be made available on the websites of banks, NBFCs, credit service providers, digital loan applications as well as key facts statements.
• Apps and websites that offer digital loans must allow borrowers to file complaints.
• Before disbursing any loan through their digital lending applications and/or through their hired loan service providers, banks and NBFCs may collect the economic profile of the borrowers they cover (age, occupation, income, etc.) to assess the borrower’s creditworthiness in an auditable manner.
• No credit limit shall be automatically increased unless the express consent of the borrower is recorded with each such increase.

Borrowers must receive permission requests and notices

Borrowers must be informed about the storage of customer data, including the types of data that can be stored, the length of time that data can be kept, restrictions on use, procedures for data disposal, procedures for dealing with security breaches, etc. Companies must always make the information available on their website pages and in applications.

Key Fact Statement

A Key Facts Statement (KFS) will be provided to the borrower at the time of disbursement for loans made using digital applications before the conclusion of the contract for all digital lending products.
The key statement should mention the borrower and also include details of the total cost of the digital loans.

The amount of the loan that is still due will be taken into account when calculating any penalties that may be assessed to borrowers. In addition, the debtor will be informed in the statement of key facts of the annual rate of any penalty costs.
No fees, levies, or other amounts can be charged to borrowers without the disclosure of fees.

The KFS must include the annual percentage rate, the recovery procedure, and information on the grievance officer specifically tasked with dealing with digital lending/fintech issues, and the cooling off /retrieval period. If the borrower decides not to continue with the loan, he has a certain period to cancel it (reflection/search period).

After the successful completion of the loan agreement or transaction, the information will be delivered to the borrowers to their verified email address or SMS. When sending information, the letterhead of the regulated institution (bank) must be used, which must contain a statement of key facts, a summary of the loan product, a sanction letter, conditions, account statements, and the privacy policy of LSP and DLA to borrowers’ data.

Lenders to ensure the reporting of the credit service providers to credit reference companies

Irrespective of the type or tenure of loans, banks and NBFCs must ensure that all lending is done through their digital lending applications and/or digital lending applications of lending service providers are reported to credit reporting companies (such as CIBIL).

Banks, NBFCs, and/or credit service providers employing the trading platform must report all extensions of structured digital lending products, including short-term, unsecured/secured loans or deferred payments, to credit reference companies.

Cooling off and Lock-up Period

The borrower must be offered the option to expressly terminate the digital loan during the cooling off/search period by paying the principal and proportionate APR during that time without incurring any penalties. The board of directors of the bank or NBFC will decide on the cooling-off period. For loans with a duration of seven days or more, the period may not be shorter than three days; for loans with a maturity period of fewer than seven days, it must not be less than one day. Prepayment will continue to be allowed as per current RBI guidelines for borrowers who continue to repay the loan even after the lock-up period.

The loan paid directly to the bank account of the final recipient

All loan servicing, repayment, etc. is done directly by the borrower to the bank account of the regulated entities, without the use of a pass-through account or joint account from a third party must be ensured by the regulated entities. The loan must always be paid directly to the bank account of the final recipient.

The only exceptions are disbursements covered solely by statutory or regulatory mandate (RBI or any other regulator), cash flows between regulated entities for pooled loans, and disbursements for specific end-uses. Unless otherwise expressly stated in these Regulations, Lenders must ensure that no payment is ever sent to a third-party account, including the accounts of Lending Service Providers and their digital lending applications.

Final words

The Reserve Bank of India is working to introduce adjustments to control digital payments and protect the interests of end users. As some illegal Fin-Tech platforms collect huge volumes of client data, including highly sensitive financial and personal data, the RBI has expressed concern over potential breaches of customer privacy by such firms. This is why RBI has taken a strong stance on customer and data privacy in its digital lending guidelines.