Tectonic Shift in the Fintech Sector after RBIs recent Digital Lending Guidelines

The guidelines specify that loan disbursal and repayment transactions have to be executed directly between the bank account of the borrowers and the REs.

The Indian Fintech sector is leading the global Fintech revolution accounting for over 40% of the world’s digital transactions. It has emerged as a disruptive sunrise industry that is set to make financial services accessible, simple, and cost-effective. The industry clocked more than 74 billion transactions in 2022. This technology-led innovation is making banking and credit services available to the underbanked and unbanked. Recently, the country has seen a proliferation of fintech start-ups offering a suite of financial services digitally. These start-ups typically collaborate with a Regulated Entity (conventional financial institutions) and offer similar services via digital technologies. However, they fell outside the purview of RBI regulations leading to instances of mis-selling, breaches of privacy, unfair business practices, exorbitant interest rates, and unethical recovery practices.

In Dec 2022, the regulator stepped in and introduced the guidelines on digital lending to rein in the regulatory arbitrage making the regulated entity responsible. These apply to the REs, LSPs (lending service providers), and DLAs (digital lending apps). The guidelines specify that loan disbursal and repayment transactions have to be executed directly between the bank account of the borrowers and the REs. LSPs/DLAs are no longer allowed to maintain a pass-through or pool account. DLAs are also barred from accessing files, media, contact lists, call logs, and telephony functions on the borrowers’ devices.

The guidelines also add obligations for clear, transparent, and periodic communication on key parameters of the lending agreement. There are requirements to record the economic profile including age, occupation, and income to assess the borrower’s creditworthiness before extending any loan. Additional requirements include explicit details of an option to exit the loan including prepayment of principal and the proportionate APR (annual percentage rate) without any penalty. The board of the RE needs to determine the cooling-off period in line with the prescribed guidelines which are based on the loan tenure. In addition, REs are also required to report any lending done through LSPs/DLAs to the Credit Information Companies (CICs).

The guidelines mandate explicit consent for any changes to the borrower’s credit limits. A Key-Fact-Statement (KFS) containing APR, recovery mechanism, other fees, and details of the nodal grievance officer is required to be provided before executing the contract. The borrowers have to be informed about the features of the loan including limits and costs at the time of onboarding. Furthermore, the information needs to be shared via email and sms upon execution of the transaction. The information dissemination should happen on REs letterhead and should include details of the privacy policy as well. The RE is required to maintain a public website and display current information on the grievance nodal officer and their partner DLAs. There are specific needs and consent requirements for data collection backed by audit trails.

The REs and their partner DLAs are also required to adhere to the RBI fair practices codes and publish them on their websites. A mechanism that identifies at-risk borrowers and guides them to available recourses has to be created. In addition, the field staff has to be trained in appropriate debt recovery practices. Unethical and coercive methods of recovery, including, calling at odd hours, threats of violence, and false consequences of non-repayment among others are strictly prohibited. Moreover, the details of the recovery agents have to be shared with the borrowers after the initiation of loan recovery.

These regulatory interventions will reinforce transparency and trust in the digital lending ecosystem. It is a step in the right direction and will protect the interests of the borrowers against unethical and unfair business practices of unregulated entities. As the digital lending industry in the country continues its steep ascend towards an ambitious $1 trillion within the decade, periodic regulatory interventions will be required to provide guard rails to manage this growth. In short term, these interventions will raise the compliance burden on the industry. One can argue that they may even raise lending costs and slow credit growth. However, in the long term, the benefits arising out of deeper credit access and penetration will far outweigh the short-term pain.

- The author is CEO and Co-founder TeamLease Regtech

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