Lending is a regulated business. All lenders and their intermediaries must play by the rules set by the lending regulator which is the Reserve Bank of India. A lot of innovation has happened in the digital lending space. These innovations were necessary to democratize access to credit for individuals and MSMEs. Video KYC, for example, has been a groundbreaking regulatory innovation by the RBI. It has allowed Indians to avail credit from the safety of their homes during the pandemic.
Alongside the digital innovations, there have also been developments that have concerned the RBI. This week, the RBI called them out as “mis-selling, breach of data privacy, unfair business conduct, charging of exorbitant interest rates, and unethical recovery practices.” To sustain India’s leadership in fintech globally and to keep bad actors from giving digital lending a bad name, the RBI announced a new set of rules.
Here’s how they concern consumers.
Direct Payments
The RBI has clarified that all loan disbursals and the repayment of the loans need to be directly between the lender and the borrower with exceptions for co-lending and for specified end-use as per regulatory guidelines. The RBI wants loans to be disbursed directly to borrower’s bank account. This has been done to check recent instances reported in the media of shell companies involving illegal hawala transactions. This is a good move to clamp down on some of the reported problems of non-compliant behavior from some rogue apps.
Credit Bureaus To Track BNPLs
All lending irrespective of nature or tenor sourced digitally needs to be reported to credit bureaus such as CIBIL and Experian. This is to check instances where some loans disbursed digitally were not being reported to the bureaus. This would help borrowers with good credit behaviour. If they have paid their dues on time, they would benefit from their disciplined behaviour being reported to the bureaus who would then give them a credit score boost.
Key Fact Sheet To Mention Costs
The RBI wants greater transparency around the loan costs. Firstly, between the lender, the loan service provider, and the borrower, all loan-related payouts need to be collected by the loan service provider from the lender. No charges can be collected by the loan service provider from the borrower. Furthermore, the borrower must receive a one-page key fact sheet mentioning the total cost of the loan. The cost must be summarized as an all-inclusive annual percentage rate (APR) just as it is with a credit card. The all-inclusive APR would also make loans comparable.
Look-Up Period for Loans
This new guideline allows the borrower to return the digital loan during a pre-defined period by paying the principal and proportionate APR without any penalty. This is somewhat similar to a free-look period in insurance where the policyholder can return the policy and collect a refund if the policy does not turn out as per their expectations. For the loans, the look-up isn’t entirely free since interest will need to be paid for the period. We need to wait for banks to create board-approved policies on this, and this customer-centric move for digital loans can be extended to all loans as well.
Consent Is Key
The customer’s consent has been prioritized. Firstly, no borrower’s credit limit can be increased with the borrower’s consent. Secondly, the RBI has limited the data that can be collected through the borrower’s phone. Apps must desist from accessing files, contact lists, and call logs. The RBI wants data collection to be need-based and only after the borrower’s consent. The consent can be given, denied, or even revoked at a later stage, and the data collected by the lender will have to be deleted if the borrower so wishes. This helps address recent scenarios reported in the news where some digital apps were seen collecting data such as phone numbers of borrower’s contacts who would be harassed in connection to payment collections.
The RBI’s progressive policies have fuelled India’s leadership in fintech globally. The fintech industry in India is both a strategic and a sunrise sector for the next 25 years to 2047. These new regulations with further empower the customer and maintain India’s leadership for decades to come.
The writer is CEO, BankBazaar.com