The Reserve Bank of India (RBI) has recently issued new guidelines to regulate the digital lending ecosystem of its regulated entities (REs) and the credit facilitation services provided by Lending Service Providers (LSPs). The guidelines state that all digital loans must be disbursed and repaid only through bank accounts of regulated entities, without the involvement of any third parties.
These guidelines are aimed at curbing the rising malpractices in the digital lending industry, including mis-selling, breach of data privacy, unfair business conduct, charging exorbitant interest rates, and unethical recovery practices. The RBI has classified digital lenders into three categories, with the latest regulatory framework focusing on the digital lending ecosystem of its regulated entities and the LSPs engaged by them.
For entities falling in the second category, the RBI recommends that the respective regulator formulate rules on digital lending based on the recommendations of the working group. For entities in the third category, specific legislative and institutional interventions are suggested by the working group for consideration by the central government to curb illegitimate lending.
The Digital Lenders’ Association of India (DLAI) has welcomed the new guidelines, stating that they provide a nuanced blueprint for responsible and sustainable growth of the digital lending ecosystem. However, the RBI has also addressed the need to stamp out incipient trends that are antithetical to customer protection and data security.
The guidelines mandate that all fees or charges payable to LSPs in the credit intermediation process shall be paid directly by the RE and not by the borrower. Additionally, any lending sourced through DLAs will have to be reported to credit bureaus by REs, irrespective of its nature or tenor.
To ensure customer protection and data security, data collected by DLAs should be need-based, have clear audit trails, and be done only with prior explicit consent of the borrower. The RBI has suggested providing options for borrowers to accept or deny consent for use of specific data, revoke previously granted consent, and delete the data collected from borrowers by DLAs/LSPs.
Overall, the new guidelines aim to promote responsible lending practices while protecting the interests of borrowers and promoting the growth of the digital lending ecosystem in a sustainable manner.