Reserve Bank of India (RBI) has been asked to prepare a ‘whitelist’

Reserve Bank of India (RBI) has been asked to prepare a ‘whitelist’

Subject :Economy

Context:

Noting concerns on increasing instances of money laundering, tax evasion and criminal intimidation by illegal loan apps, the Finance Minister outlined multiple steps to prevent operations of such lenders.

Details:

• Reserve Bank of India (RBI) has been asked to prepare a “whitelist” of all the legal loan applications and the Ministry of Electronics and Information Technology (MeitY) has been asked to ensure that only those apps are hosted on app stores.
• The RBI will also monitor money laundering through mule/rented accounts.
• RBI will review or cancel dormant non-banking financial companies (NBFCs) to avoid their misuse
• The central bank will also ensure registration of payment aggregators within a timeframe and remove unregistered payment aggregators within a timeframe.
• The Corporate Affairs Ministry will identify shell companies and deregister them to prevent their misuse.
• Steps would be taken to increase cyber awareness for customers, bank employees, law enforcement agencies and other stakeholders.
• All ministries or agencies will take all possible actions to prevent operations of such illegal loan apps.

Concept:

White list:

It is a  list of people or things considered to be acceptable or trustworthy.

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.

Latest guidelines by RBI:

• 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.