While tightening norms for digital lending, the Reserve Bank of India (RBI) recently rolled out a set of rules to protect consumers from breach of data privacy, unfair business, exorbitant interest rates as well as unethical recovery practices by fintech players.
The entities regulated by the RBI such as commercial banks, will need to ensure that existing digital loans comply with RBI's digital lending guidelines by the deadline that expires on November 30 this year .
These guidelines have a set of consumer-friendly provisions. Some of them mandate that they are not supposed to access the borrower’s mobile phone resources and don’t increase the credit limit without the user's consent.
These rules will be applicable not only to the customers who are set to avail fresh loans but also to the customers getting onboarded from the date of the circular i.e., September 2.
Under these guidelines, the Reserve Bank said fintech players are meant to give a cooling off period to the borrowers to exit a digital loan by paying principal and the proportionate annual percentage rate without penalty during this period.
“However, in order to ensure a smooth transition, REs shall be given time till Nov 30, 2022 to put in place adequate systems and processes to ensure that existing digital loans are in compliance with these guidelines in both letter and spirit,” reads the RBI circular. This applies even to the digital loans sanctioned on the date of the circular.
The latest guidelines are welcomed by the industry experts and consumers alike.
"Regulation couldn’t have come at a better time when we are seeing growth and scale momentum building in and a clear regulatory framework is a bedrock to scale on a sustainable basis. Regulations will further build customer trust in digital lending and expand the market further to new products and market segments and geographies," says Sugandh Saxena, CEO, Fintech Association for Consumer Empowerment (FACE).
"Surely, many digital loans while rated high on customer experience, convenience, and speed, were perhaps opaque in making customers understand the complexities. We strongly believe that digital lending guidelines provide robust and clear directions for the industry to operate and offer digital loans in a responsible way," she adds.
Anikant Rajput, a young working professional in his late 20s who has borrowed small amounts in the recent past from fintech apps, says the arm-twisting tactics of some of the digital lending apps are grossly unfair and the situation, he believes, will improve going forward.
“With RBI coming in the picture, I feel borrowers will get a sense of relief and confidence that they won’t be taken for a ride. Also, with a regulatory framework in place, fintech players will also have little headroom to play around with the consumers’ interest,” said Deepak Aggarwal, a Delhi-based financial expert.
Some of the provisions of the RBI’s rules in detail:
Storing of data: The regulated entities need to ensure that any collection of data by their digital lending apps is need-based and only subject to prior and explicit consent of the borrower having audit trail.
In any case, the entities must ensure that these lending apps refrain from accessing mobile phone resources such as file and media, contact list, call logs, telephony functions.
Cooling off period: About the cooling off period, the regulator says that borrower need to be given an explicit option to exit digital loan by paying the principal and the proportionate APR without any penalty during this period.
The cooling off period should not be less than three days for loans having tenor of seven days or more and one day for loans having tenor of less than seven days.
Loan disbursal: The entities regulated by RBI will ensure that all loan servicing, repayment, etc. will be executed by the borrower directly in the RE’s bank account without any pool account of any third party.
The RBI first released the recommendations of the working group on digital lending on August 10. Later, the regulator released the latest guidelines on September 2 with a timeframe of November 30 for these digital lending entities to follow these rules.
For the uninformed, the Reserve Bank had constituted a Working Group on ‘digital lending including lending through online platforms and mobile apps’ (WGDL) on January 13, 2021.
Subsequently, the report submitted by the WGDL was placed on the RBI website, inviting comments of stakeholders and members of the public.
After taking into account the inputs received from diverse set of stakeholders, a regulatory framework for digital lending was ramped up.
This framework was based on the principle that lending business can be carried out only by entities that are either regulated by the Reserve Bank or entities permitted to do so under any other law.