Digital lending
- August 11, 2022
- Posted by: OptimizeIAS Team
- Category: DPN Topics
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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.