This Article discusses the existing Indian fintech ecosystem and its growing concerns that led the Reserve Bank of India (RBI) to issue Guidelines on Digital Lending (Guidelines) in September 2022[1] to bring the burgeoning segment under proper regulation.In February 2023, the RBI came out with detailed set of FAQs[2] to clarify issues relating to the Guidelines. The present article gives a comprehensive update regarding the alterations and definitions made through the FAQs.

  1. Scope of Digital Lending

When developed, the guidelines provided a narrow notion of digital lending which holds that the process of offering loans is chiefly a digital process that integrates digital tools during and/or after loan origination[3]. But the FAQs[4] elaborated that partial digital processes are also taken to be digital lending as long as the digital technologies prevail in the transaction. For instance, even if some phases are physical interfaces, such a transaction can be categorized as digital lending, so long as the essence of the guidelines is honoured. These measured modifications further emphasize RBI’s intention to regulate hybrid models under the existing regulatory framework in order to safeguard borrowers engaged in digital as well as physical lending models.

  1. Grievance Redressal Mechanism

An essential part of the Guidelines was the grievance redressal standards where LSPs shall designate grievance redressal officers by which consumers could seek redressal of their grievances[5]. The FAQs[6] introduced a key distinction: the new law only requires LSPs that directly engage borrowers to appoint personnel to act in such capacities. However, responsibilities for complaint management and handling of complaints belong to the Regulated Entities (REs), so the ultimate responsibility returns to the lending institutions. On this ground, the approach is rather finer tuned to strike a balance between the operational requirements of LSPs and the borrower to solve the problem.

  1. The Flow of Funds and the Role of LSPs

The guidelines herein provided a very strict provision whereby loan disbursals and repayments were strongly required to be made between the bank accounts of offer and acceptor, no third-party involvement was allowed[7]. To this principle, the FAQs[8] provided elaboration: Minimally, Lending Service Providers could not have direct or indirect control over fund flows. Furthermore, though there are many categories exempted from these guidelines, any Payment Aggregator (PA) that acts as an LSP needs to follow all the guidelines. It narrows operational loopholes through which carriers or other intermediaries may evade the stringent controls outlined in the guidelines.

  1. Specific scenarios in Loan Products

The FAQs addressed several product-specific ambiguities, ensuring consistency across various lending scenarios:

      1. EMI Programs on Credit and Debit Cards: It added that EMI programs regulated under the RBI’s Master Directions on Credit and Debit Cards are outside the purview of the new rules. However, anything in credit or debit card-based loan products are included in the digital lending space[9].
      2. Salary-Based Loan Repayments: The FAQs held that it was acceptable for corporate employers to make deductions in respect of Equated Monthly Installments (EMIs) for direct payment to the lending employer. However, it should be mandatory that the LSPs should not have any influence on fund management[10].
      3. Co-Lending Transactions: Limited relief for fund flow between REs was allowed if they are in co-lending and no third-party exercises control over the transaction, according to the RBI[11]. This flexibility was made available to priority sector as well as non- priority sector of loans[12].

These clarifications indicate the RBI’s understanding of variation in digital lending products as well as its attempt to calibrate the proposed regulations based on the variation in operational structures of different online lending platforms.

      1. Cooling-Off Period and Borrower Flexibility

The initial guidelines required a cooling-off or ‘look-up’ period during which borrowers could withdraw from loans without penalty[13]. The FAQs that introduced operational certainty by enabling lenders to maintain reasonable one-time processing fees provided disclosed upfront in the Key Fact Statement (KFS). It enables the creditors to be paid for real costs they undertake, at the same time maintaining flexibility for borrowers[14].

      1. Reporting of Charges in APR Computation

The FAQs offered critical insights into the calculation of the Annual Percentage Rate (APR), which is pivotal to ensuring cost transparency for borrowers:

        1. Insurance Charges: The APR can only contain insurance charges which are component features of the loan product. Such differentiation reduces misleading cost disclosures while ensuring comprehensive information disclosed to borrowers[15].
        2. Floating Rate Loans: In the case of loans with variable rates, the APR has to be the rate at the time of loan origination and has to be adjusted every time the rate of interest is changed. Any changes to these cost items must be communicated to the borrowers immediately using the SMS or email[16].
        3. Penal Charges: The RBI again clarified that it had to be established that penal charges be levied on the outstanding loan amount and the amount under default has to act as the cap[17]. Others such as cheque bounce fees may not require annualization but must be presented separately in the KFS on per instance basis[18].

These clarifications also reaffirm the RBI’s efforts to bring costs disclosures to a common platform and reduce borrowers’ confusion and unfairness.

      1. Data Privacy and Recovery Practices

First, data privacy was a part of the primary guidelines, and the FAQs reinforced the RBI’s promise of borrowers’ protection. In another policy that affected social lending, the RBI clearly prohibited the collection of borrower information that is considered sensitive—such as contact lists or media files without valid reason to do so, and if the borrower’s permission has not been sought[19]. Also, borrowers were granted the right to withdraw consent and to erasure of data.

With regard to recovery practices the FAQs permitted cash-based recovery where necessary in the event of default on loans. However, such transactions cannot go unrecorded in the borrowers’ account and any fees owed to the LSPs have to be received straight from the REs and not be recovered along with the proceeds[20]. This makes the evaluation and recovery practices understandably ethical while possessing organisational accountability.

      1. Borrower communication enhancement

The FAQs expected the lenders to produce important information at different points of loan transaction. The borrowers have to be informed about empanelled recovery agents at the time of loan sanctioning; they have to be informed the name of the particular recovery agency chosen before making an attempt to recover the money[21]. This measure improves the borrowers’ knowledge level and halts illegal recovery actions.

      1. Operational Practicality for Lenders

It was noted that the present set of FAQs was well balanced between the borrowers and lenders’ interests, as well as being practically implementable. Specificity on some soft use cases, such as co-lending, repayment through salary, and product-specific waivers, helped the RBI make sure that restrictions do not subvert the regulatory purpose without compromising for variables in the digital lending marketplace.

Conclusion

This is evident from the RBI’s FAQs on Digital Lending wherein the regulatory has gone out of its way to respond to stakeholder concerns without compromising on the values espoused by the better part of digital lending – transparency, one-minute accountability, and protection of consumers. Because of the elaboration of uncertainty within operations and the enhancement of proper sections, the RBI has created a solid legal basis that may encompass numerous prospects of digital operations. These policies do not only shield borrowers from exploitation but also promote a sustainable new generation digital lending. This kind of approach to regulation will be necessary as the sector develops and to ensure that the right blend of innovation and regulation is struck.

Author: Mukund Gupta

Footnotes

[1] https://rbi.org.in/Scripts/NotificationUser.aspx?Id=12382&Mode=0

[2] https://www.rbi.org.in/commonman/English/Scripts/FAQs.aspx?Id=3413

[3] Clause 2.3

[4] FAQ 1

[5] Clause 6.1

[6] FAQ 3

[7] Clause 3

[8] FAQ 7

[9] FAQ 4

[10] FAQ 10

[11] Clause 3

[12] FAQ 11

[13] Clause 8

[14] FAQ 16

[15] FAQ 6

[16] FAQ 5

[17] FAQ 14

[18] FAQ 15

[19] Clause 10.1

[20] FAQ 9

[21] FAQ 17

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