The Reserve Bank of India released new guidelines on digital lending on September 02, 2022, to ensure transparent, easy, and reliable digital lending. The guidelines shall be applicable to both existing consumers availing of fresh loans and new ones. The RBI has given the regulated entities (REs) time till November 30, 2022 to ensure that the new loans as well as the existing ones are as per the new guidelines. These guidelines will be applicable to all commercial banks, primary cooperative banks, state cooperative banks, district central cooperative banks, and non-banking financial companies including housing finance companies.
Some Highlights of the Guidelines
The new guidelines included rules regarding the disbursal of funds and the repayments that required the REs to transact directly to and from the customer without involving any third parties, even the legal service providers (LSPs). All the fees charged and the penalties should be disclosed annually through the Key Fact Statement (KFS). Any fee that is not mentioned in the KFS cannot be charged by the REs. The REs should mention the list of LSPs engaged and their activities on their websites.
Moreover, the guidelines also mentioned the limit to the usage of consumer data. Therefore, the data should be collected based on their need. REs shall ensure that the data from mobile such as file, media, contact list, call logs, camera, etc., is taken only for the KYC requirements and with the explicit consent from the borrowers. REs also have to ensure that the LSPs do not store any personal information apart from basic information, such as name, address, contact details, etc. LSPs should not store any biometric data. REs should also ensure that the technology for cybersecurity meets the requirements of the RBI.
The REs should allow the borrowers to raise a complaint on their websites or apps which should be resolved within 30 days. If the complaint is not solved within 30 days, another complaint can be lodged with the RBI-integrated portal.
Why the Need of New Guidelines
Offline lending is usually carried on physically by banks and involves NBFCs (non-banking financial companies) while digital lending is carried on by the LSP using any digital platform. These guidelines have been introduced to remove the existing discrepancies in the digital lending domain. It was observed that lending in digital loans has been problematic. The credit limit is set high beyond the capacity of the borrower and without proper verification. There have been issues of high-interest rates, excessive involvement of third parties, misinformation to the borrowers, and concerns about privacy and security. So, the guidelines will reduce unethical practices to lend, demanding repayments, collection, storage, and usage of data, etc.
Significance and Implications
The new guidelines would make the process of digital lending transparent, reliable, and trustworthy. Regulated and transparent digital lending would help in the financial inclusion of the low-income and unorganised sectors of the economy who borrow from informal lenders and pay exorbitant interest rates because of the lack of awareness as well as the lack of collateral (an asset pledged by a borrower to a lender until a loan is returned). With digital lending platforms, credit is also easily available in need of short-term loans, and a lot of time is also saved.
As per RBI, digital lending in India has increased from Rs 11,671 crores in 2017 to Rs 1,41,821 crores in 2020.
Nonetheless, the new guidelines will attract some drawbacks, as well. For example, credit provisions (buy-now-pay-later) by e-commerce websites such as Amazon and Flipkart, will be affected as they are the third party credit providers for the consumers. Besides shopping websites, the prepaid card providers will also be affected.
Therefore the RBI needs to provide detailed guidelines and exceptions considering the demand and utility to the consumers.
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