Pursuant to the Report of the Reserve Bank of India (“RBI”) Working Group on Digital Lending, issued on November 18, 2021, and the RBI Press Release on ‘Recommendations of the Working Group on Digital Lending – Implementation’, dated August 10, 2022 (“August Press Release”), the RBI released the Guidelines on Digital Lending on September 2, 2022 (“Guidelines”). Our Alert examines the key changes introduced and industry implications.
Analysis:
(i) The Regulated Entities, including banks and NBFCs (“REs”), are required to ensure that the Lending Services Provider (“LSP”) engaged by them and the Digital Lending App (“DLA”) (RE’s or LSP’s) comply with these Guidelines.
As ‘DLA’ and ‘LSP’ is not exhaustively defined, it is likely to raise interpretation issues qua scope, including FDI treatment for such DLAs/ LSPs.
(ii) The Guidelines apply to (a) existing customers availing fresh loans; and (b) new customers. REs have been given time till November 30, 2022, to ensure that existing digital loans are compliant with these Guidelines.
(iii) Loan Disbursal/ Servicing/ Repayment – All loan disbursements must be made into the borrower’s bank account and servicing/ repayment must be directly in the RE’s bank account, without any pass-through account/ pool account of any third party.
However, disbursals required under (i) statutory or regulatory mandate; (ii) money flow between REs for co-lending transactions; and (iii) disbursals for specific end use, directly into the beneficiary’s bank account, are exempt. Under no circumstances is disbursal to a third-party account (including that of LSPs and DLAs) permitted.
Above change may require clarity around digital lending business models, involving
payment aggregator1 tie-ups and funds processing.
(iv) Fees/ Charges/ Disclosures – Must be paid directly by REs to LSPs, and cannot be charged by the LSP to the borrower. Interest rate for digital loans must be disclosed upfront by REs. REs have to provide borrowers with key fact statement before contract execution for all digital loans, containing prescribed details.
(v) Digital Signature – Prescribed documents must be digitally signed and flow automatically to the borrowers on digital loan registration, with email/ SMS verification upon loan execution.
This has raised a debate in the industry as to whether the prescribed ‘digital signature’
requirements under the IT Act, 2000, are required to be followed.
(vi) Borrower Creditworthiness – REs are required to assess the borrower’s creditworthiness in an auditable way.
(vii) Free ‘look-in’ Period – Borrower must be given an option to exit the digital loan by paying the principal and the pro-rata interest, without any penalty, during a Board prescribed cooling-off period.
(viii) Data Restrictions – Data collection should be ‘need-based’, following basis explicit borrower consent with audit trail.
One-time access permitted for onboarding/ KYC, with explicit borrower consent. However, REs must ensure that DLAs desist from accessing mobile phone resources such as file, media, contact list, call logs, telephony functions, etc. Detailed data protection/ privacy, storage, privacy policy and technology related provisions are prescribed.
(ix) Bureau Reporting – REs are required to ensure that any lending through DLAs is reported to credit information companies.
(x) FLDG – In a modification from the August Press Release, the Guidelines acknowledge the industry practice of offering FLDGs, where a third-party guarantees to compensate up to a certain % of default in the RE’s loan portfolio. However, the Guidelines ‘advise’ the REs to adhere to the Securitisation Master Directions, 2021 (“Directions”), especially the synthetic securitisation provisions in Para 6(c).
However, the above point is raising multiple industry questions:
(i) are third-party FLDGs banned;
(ii) does ‘advised’ mean mandatory or is it a recommendation?;
(iii) if mandatory, given the spirit, and the language in Annex-2, August Press Release, is compliance required only with Para 6(c), or the entire Directions, which may raise unintended consequences;
(iv) implications for NBFC to NBFC/ Bank FLDG models – would the FLDG provider NBFC be considered a ‘third party’.
Conclusion:
Given the above issues, it may be useful if the RBI issues clarificatory FAQs to avoid multiple interpretations by the industry, which includes most banks, NBFCs and many fintechs in India and globally.
The public debate and ongoing investigations around ‘digital lending’ has resulted in a fair bit of industry confusion this year and a definitive position on this issue – given the number of players affected and investments in the fintech/ tech sector in recent years, including in the digital lending space, which cuts across most fintechs/ aggregator platforms – is required.
