RBI targets unfair methods in digital lending with new norms

RBI targets unfair methods in digital lending with new norms

RBI targets unfair methods in digital lending with new norms

For Mains

Working Group on Digital Lending (WGDL)

  • The RBI constituted a Working Group on ‘digital lending including lending through online platforms and mobile applications (WGDL) on January 13, 2021.
  • The thrust of the report has been on enhancing customer protection and making the digital lending ecosystem safe and sound while encouraging innovation.

The following are a gist of the key recommendations:

  • Subjecting the Digital Lending Apps to a verification process by a nodal agency to be setup in consultation with stakeholders.
  • Setting up of a Self-Regulatory Organisation (SRO) covering the participants in the digital lending ecosystem.
  • Separate legislation to prevent illegal digital lending activities.
  • Development of certain baseline technology standards and compliance with those standards as a pre-condition for offering digital lending solutions.
  • Disbursement of loans directly into the bank accounts of borrowers; disbursement and servicing of loans only through bank accounts of the digital lenders.
  • Data collection with the prior and explicit consent of borrowers with verifiable audit trails.
  • All data is to be stored in servers located in India.
  • Algorithmic features used in digital lending are to be documented to ensure necessary transparency.
  • Each digital lender provides a key fact statement in a standardised format including the Annual Percentage Rate.
  • 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.
  • Maintenance of a ‘negative list’ of Lending Service Providers by the proposed SRO.
  • A standardised code of conduct for recovery is to be framed by the proposed SRO in consultation with RBI.

Key Features of the new framework

  • All loan disbursals and repayments will need to be executed only between the bank accounts of the borrower and the Regulated Entities (RE) – such as a bank or a non-banking financial company – without any pass-through or pool account of the Lending Service Providers or any third party.
  • Any fees, charges, etc., payable to LSPs in the credit intermediation process shall be paid directly by RE and not by the borrower.
  • A standardized Key Fact Statement (KFS) must be provided to the borrower before executing the loan contract.
  • All-inclusive cost of digital loans in the form of Annual Percentage Rate (APR)6 is required to be disclosed to the borrowers. APR shall also form part of KFS.
  • Automatic increase in credit limit without explicit consent of the borrower is prohibited.
  • A cooling-off/ look-up period during which the borrowers can exit digital loans by paying the principal and the proportionate APR without any penalty shall be provided as part of the loan contract.