The Reserve Bank of India (RBI) released guidelines for the digital lending space in an effort to mitigate the concerns arising from credit delivery through digital lending methods. The guidelines, aimed at curbing rising malpractices in the digital lending ecosystem, follow the recommendations of a working group for digital lending, whose report was made public in November 2021.

The central bank classified digital lenders 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.

The latest regulatory framework is focused on the digital lending ecosystem of RBI’s regulated entities (REs) and the lending service providers (LSPs) engaged by them to extend credit facilitation services.

• All digital loans must be disbursed and repaid through bank accounts of regulated entities only, without pass-through of loan service providers (LSPs) or other third parties,
• Apart from direct disbursals and repayments of digital loans, the norms mandate that any fees or charges 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. The all-inclusive cost of digital loans in the form of annual percentage rate (APR) will have to be disclosed to borrowers. The APR shall also form part of KFS. 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 during which borrowers can exit digital loans by paying the principal and the proportionate APR without any penalty.
• REs will have to ensure that they and the LSPs en6gaged by them shall have a suitable nodal grievance redressal officer to deal with complaints related to fintech and digital lending. The grievance redressal officer shall also deal with complaints against their respective digital lending apps (DLAs). Details of the grievance redressal officer must be prominently displayed on the website of the RE, its LSPs and on DLAs.
• As per existing RBI guidelines, if any complaint lodged by the borrower is not resolved by the RE within the stipulated 30-day period, they can lodge a complaint under the central bank’s integrated ombudsman scheme.

• All new digital lending products extended by REs over merchant platforms involving short term credit or deferred payments must also be reported to credit bureaus by the REs.

• Data collected by DLAs has to be need-based, with the customer’s prior consent, and can be audited, if required. The central bank mandated that DLAs should not access mobile phone resources, such as files and media, contact list, call logs, and telephony functions. However, one-time access can be taken to camera, microphone, location, or any other facility necessary for onboarding/ KYC requirements only with the explicit consent of the borrower.

• Further, these apps have to provide an option to borrowers to accept or deny consent for the use of specific data, including the option to revoke previously granted consent, besides the option to delete the data collected from borrowers by DLAs/LSPs.

As for entities falling in the second category, the respective regulator may consider formulating rules on digital lending, based on the recommendations of the working group, the RBI said. For entities in the third category, the working group has suggested specific legislative and institutional interventions for consideration by the central government to curb illegitimate lending.

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The Reserve Bank of India is the supreme monetary and banking authority in the country. It keeps the cash reserve of all scheduled banks and hence is known as Reserve Bank. It was established on April 1, 1935. Though originally privately owned, since its nationalization in 1949, the Reserve Bank is fully owned by the Government of India. Its main function includes; formulating, implementing, and monitoring the monetary policy, prescribing broad parameters of banking operations within which the country’s banking and financial system functions, Managing the Foreign Exchange Management Act, 1999, Issues and exchanges or destroying currency and coins not fit for circulation, Banker to the Government: performs merchant banking function for the central and the state governments; also acts as their banker.