Digital lending regulations to abate borrower woes?

The Reserve Bank of India (RBI) released guidelines for online lenders as part of its effort to stifle the unauthorised platforms that had previously spiralled. The regulatory framework has been firmed up to support orderly growth of credit delivery through digital lending.

Accepting some of the recommendations made by the Working Group on ‘digital lending including through online platforms and mobile apps’(WGDL), the RBI said that the guidelines were prepared on the principle that the lending business can be carried out only by entities that are either regulated by the RBI or entities permitted to do so under any other law.

It divided digital lenders into three groups : 

• Entities regulated by the central bank; 
• Those authorised to carry out lending as per other statutory or regulatory provisions but not regulated by the RBI; and 
• Entities lending outside the purview of any statutory or regulatory provisions.

1. The RBI’s regulatory framework focuses on the first group: those regulated entities (RE) that come under its regulatory purview and lending service providers (LSPs) engaged by them to offer credit services.
   LSP is a agent of the regulated entity, which could be a bank, who performs one or more of the lender’s functions in customer acquisition, such as underwriting support, pricing support, disbursement, servicing, monitoring, collection, and recovery of particular loans, in exchange for payment from RE.
2. With respect to the players in the second category, the RBI said that the respective regulator or the controlling authority may consider formulating or enacting appropriate rules and regulations on digital lending.
3. For the entities in the third category, its working group had suggested specific legislative and institutional interventions for consideration by the central government to curb the illegitimate lending activity being carried out by them.
4. The RBI said that all loan disbursals and repayments are required to be executed only between the bank accounts of the borrower and RE. This eliminates the presence of a nodal pass-through or pool account of the LSP.
5. Regulated Entities are required to ensure that any lending carried out through DLAs has to be reported to Credit Information Companies (CICs).
6. Lending through the Buy Now Pay Later (BNPL) mode also needs to be reported to the CICs.
7. REs have to provide a Key Fact Statement (KFS) to the borrower before the execution of the contract in standardised format for all digital lending products.
8. Any fees or charges that are payable to LSPs in the credit intermediation process will be paid directly by RE and not by the borrower.
9. Borrowers must be informed of the annual percentage rate (APR), which represents the total cost of digital loans. The all-inclusive cost and margin, including the cost of money, processing fees, and verification costs, should be the basis for the APR. APR must be included in the key fact statement and given to the borrower up front in a standardised way. The REs are not permitted to charge the borrower any fees or levies that are not covered by the KFS at any time throughout the loan’s duration.
10. The RBI also barred an automatic increase in credit limit without the explicit consent of the borrower.
11. Banks and the LSPs associated with them must appoint a nodal grievance redressal officer to deal with fintech- or digital lending-related complaints. If any complaint lodged by the borrower is not resolved by the RE within the stipulated period (currently 30 days), they can lodge a complaint under the Reserve Bank – Integrated Ombudsman Scheme(RB-IOS)7. These are aimed at customer protection.
12. Data collected by the digital lending apps (DLAs) should be need-based and should have clear audit trails. It should be collected with prior explicit consent of the borrower.
13. The borrowers have the option to accept or deny consent for use of specific data, including the option to revoke previously granted consent.
14. The RBI has also mandated loans to be reported to credit bureaus

A working committee was established by the central bank in January 2021 to investigate all facets of digital lending operations carried out by both regulated and unregulated parties. These rules have been imposed by the RBI to prevent consumer misselling, unethical business practices, outrageous interest rates, and an excessive amount of third parties being involved in digital lending transactions.
To ensure a smooth execution of regulations, digital lenders intend to ask the Reserve Bank of India (RBI) for clarifications on any uncertainties relating to operational elements of the guidelines for digital lending. Dissatisfaction among payment aggregators is on the rise, as their complete elimination from the operation process has left them perplexed and confused while fin-techs go back to work out new business models and find a place for themselves in the lending system.
First loan default guarantees (FLDGs) regulation is still being considered, according to the central bank, which will likely be seen as a highly positive development considering that the fintech sector had expected an outright ban on the FLDG concept.

A FLDG agreement provides compensation to a lender in the event of a borrower failure.
From the lender’s standpoint, supplying FLDG assures the platform has skin in the game, whereas from the LSP’s perspective, it serves as an example of its underwriting prowess. Practically speaking, the LSP assumes all credit risk without having to maintain regulatory capital.
All FLDG structures must abide by the RBI’s 2021 standards for the securitization of standard assets under the new regulations. The majority of FLDG structural requirements will likely be introduced. It seems that the FLDG lending model will only continue to be used by LSPs having an NBFC as part of their group structure.

All parties will struggle in the short term. Tech agility will eventually become a significant differentiator for NBFCs.