Digital lending

Digital lending

Subject :Economy

Section: Monetary Policy

Context: Reserve Bank of India (RBI) has issued guidelines for entities engaged in digital lending.

Details

• The guidelines apply to the RBI’s regulated entities (REs) and the LSPs engaged by them to extend credit facilitation services.
  • For the second category digital lenders, the respective regulator may formulate rules on digital lending, based on the recommendations of the working group.
  • For entities in the third category, the working group has suggested specific legislative and institutional interventions for consideration by the government to curb illegitimate lending.
• All digital loans must be disbursed and repaid through bank accounts of regulated entities only, without pass-through of lending service providers (LSPs) or other third parties.
• Any fees payable to LSPs in the credit intermediation process shall be paid directly by the RE and not by the borrower.
• A standardised key fact statement (KFS) must be provided to the borrower before executing the loan contract including all-inclusive cost of digital loans in the form of annual percentage rate (APR).
• Automatic increases in credit limit without the explicit consent of borrowers has been prohibited.
• The loan contract must provide for a cooling-off or look-up period for loan exit without any penalty.
• All digital lending products involving short term credit or deferred payments must also be reported to credit bureaus by the REs.

Concept:

Digital Lending:

• It consists of lending through web platforms or mobile apps, by taking advantage of technology for authentication and credit assessment.
• Banks have launched their own independent digital lending platforms to tap in the digital lending market by leveraging existing capabilities in traditional lending.

Digital lenders are classified into three categories: 

• entities regulated by the RBI and permitted to carry out lending business,
• entities 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.

Steps Taken by RBI:

• Non-Banking Financial Companies (NBFCs) and banks need to state the names of online platforms they are working with.
• RBI has also mandated that digital lending platforms which are used on behalf of Banks and NBFCs should disclose the name of the Bank(s) or NBFC(s) upfront to the customers.
• The central bank had also asked lending apps to issue a sanction letter to the borrower on the letter head of the bank/ NBFC concerned before the execution of the loan agreement.
• Legitimate public lending activities can be undertaken by banks, NBFCs registered with the RBI and other entities who are regulated by state governments under statutory provisions.
• The RBI constituted a WG on digital lending including lending through online platforms and mobile apps in January, 2021.
  • The panel was set up in the backdrop of business conduct and customer protection concerns arising out of the spurt in digital lending activities.
  • Key proposals:
    • Digital lending apps should be subjected to a verification process by a nodal agency to be set up in consultation with stakeholders.
    • To set up a Self-Regulatory Organisation (SRO) covering the participants in the digital lending ecosystem.
      • The use of unsolicited commercial communications for digital loans to be governed by a code of conduct to be put in place by the proposed SRO.
      • The maintenance of a ‘negative list’ of lending service providers by the proposed SRO.
    • Disbursement of loans should be directly into bank accounts of borrowers.
    • All data to be stored in servers located in India.
    • Algorithmic features used in digital lending to be documented should ensure necessary transparency.