Industry leaders welcome RBI’s tightening of rules around digital lending

By Puja Sharma

In line with RBI tightening the rules for digital lending, the central bank in its public statement mentioned regulated entities must now ensure that loan servicing and repayments are executed directly into their bank accounts without using the pass-through or pool accounts of third parties. The borrower’s bank account must also be credited with the disbursements. RBI also said any fees or charges payable to lending service providers should be paid directly by the regulated entity and not by the borrower.

To regulate digital lending entities, RBI established a working group in January 2021. Lending business can only be conducted by entities regulated by the central bank or authorized to do so by any other law, according to the new guidelines. Lenders are prohibited from automatically increasing credit limits without borrowers’ consent under these rules, applicable only to RBI-regulated entities and lending service providers.

Sanjay Kao, EVP APAC, Lentra, a SaaS company empowering lenders with digital lending, said, “The norms introduced by the RBI are imperative for the smooth functioning of the lending ecosystem. I believe these guidelines are progressive moves taken in the interest of customers that will reduce, if not outright eliminate, consumer mistreatment, privacy violation, and rampant Know Your Customer violations. Simultaneously, the norms will compel lenders to reveal their data, credit assessments, and underwriting strategies and offer borrowers complete control over their data. This will work toward building customer confidence in the lending system and increase their willingness to explore digital lending avenues.”

This is akin to the early years of Unit Linked Insurance Plan (ULIPs), when lack of regulation led to unhealthy practices such as exorbitant commissions, giving the industry an ill repute. Once regulated, there was an overall acceptance of ULIPs as an investment instrument resulting in healthy growth.

With its sharp vision of making digital lending more secure and synchronized, the center has already spelled out the next steps to be followed by FinTech and financial institutions. In addition to this, I believe FinTechs need to proactively work with the regulators and develop solutions under the regulatory umbrella. In turn, the regulator must level the playing field and encourage and facilitate innovation. Also, FinTech needs to set in place adequate and transparent risk management controls. This will increase customer confidence and market acceptance and provide the financial stability that will enable them to thrive in a more regulated business environment.

The framework is based on the principle that lending business can be carried out only by entities that are either regulated by the central bank or entities permitted to do so under any other law.

Saurabh Puri, Chief Business Officer of Zaggle, digital payments, cashback, and analytics company said, “Digital Lending Applications (DLA) powered by Fintechs and Regulated Entities has brought in innovation in the financial system. The Digital Lending Applications uses the power of data and tech capabilities to make the customer experience of borrowing seamless.”

Lenders and borrowers benefit from seamless customer acquisition, the credit assessment, loan approval, disbursement, repayment, and customer service. However, certain concerns have emerged that include breach of data privacy, unfair business conduct, charging of exorbitant interest rates, and unethical recovery practices. RBI’s guideline on digital lending is a step towards curbing these concerns.

“The RBI has demonstrated consumer centricity not just in the most recent announcement but has been consistent across regulatory announcements in the recent past. Firstly, we welcome the regulation. We’ve always maintained that it’s imperative to provide consumers with a safe environment that empowers them to fully utilize the potential of credit. Most new customers today are borrowing for the first time and a growing share is coming through digital channels.” Said, Gaurav Chopra, Founder, and CEO of IndiaLends digital lending and borrowing marketplace helping borrowers with lenders to help them access affordable credit.

That’s where we believe a framework ensures responsible players are rewarded for working in the interest of the consumer. Issues related to lack of transparency, data protection, and privacy, as well as user consent have been contentious issues, and these are precisely the problems we’ve looked to solve since inception. We’re glad that there’s an able working group that understands consumers’ issues as well as the digital lending landscape. They have given a set of fair recommendations, which the RBI has accepted. This shall only boost the consumers’ confidence and trust in the credit system, and will allow players like us to continue our business without any changes to the business model.”