The RBI’s rules for digital lending: Will they alter the way loans are made?

Both current customers who have digital loans and prospective customers who apply for loans in the future must abide by the new RBI regulations for digital lending.

A new framework for digital lending has been established by the Reserve Bank of India (RBI), and regulated firms are working to comply with the new standards by November 30, 2022. Both current clients of digital loans and new customers who request for loans in the future will be subject to the new regulations.

Let’s first clarify the differences between the online and offline lending processes before examining how the RBI’s new regulations on digital lending would affect the market for online loans.

How Will the New Rule Affect the Loan Procedure?

It was discovered that several LSPs engaged in questionable lending practises, such as granting credit that was significantly higher than the borrower’s capacity to repay. Concerns about the security of the borrower’s data were also voiced. In order to simplify the procedure and improve security in the digital lending process, the RBI issued new regulations. The goal is to end unethical behaviour and bring under its control unregulated third parties.

Only necessary information can be obtained from borrowers with their prior consent under the new digital lending law, and if necessary, that information can then be audited afterwards. A nodal grievance officer will now be required to handle concerns about digital lending or the fintech company involved in the lending process. The LSP and the bank are required to negotiate the fees associated with the digital lending procedure. The borrower cannot be required to pay these fees. Now, all lending, including Buy Now Pay Later (BNPL), must be disclosed to the credit reporting agencies (CIC).

Digital Lending Vs Offline Lending

The borrower must go to the lender’s branch to submit a physical loan application during the offline lending process. Following the completion of the due diligence procedure, the lender approves the loan. It typically takes a long time, and the borrowers are restricted to only borrowing money from lenders who are located close to them. When comparing loans from various lenders offline, it can be challenging. On the other hand, digital lending enables a borrower to submit a loan application through the lender’s website. The procedure is frequently simple, efficient, practical, and paperless.

In contrast to digital lending, which typically involves a lending service provider (LSP) that typically provides the digital lending platform, offline lenders typically include banks and NBFCs.

Transparent Digital Lending

For borrowers, the entire procedure will become more transparent, reliable, and trustworthy thanks to the new regulation on digital lending. It will result in competitive growth among online lenders. In order to grow the digital lending sector, banks/NBFCs and LSP are now expected to focus more on creating a better customer experience.

According to Bankbazaar.com’s general counsel, Soumee Bhatt, “RBI is mandated to regulate credit in India. In order to ensure orderly growth, maintain finance stability, and safeguard the interests of depositors and customers, it has always supported innovation in the financial system, products, and credit delivery systems. There are several factors drawing attention to the digital lending sector. The apex bank has established these rules to streamline the industry, reduce risks, and pave the way for the nation’s digital lending ecosystem to develop.

The goal of digital lending is to make it possible for those at the bottom of the financial pyramid to participate in India’s financial system.

RBI’s digital lending norms and data privacy concerns

Previously a small supporting player, fintech-led innovation is now at the heart of how financial goods and services are conceived, valued, and provided. Particularly under the regulatory sandbox framework, the merging of technology in the financial sector has been embraced as a beneficial trend. These programmes, however, typically include both advantages and risks. The development and adoption of online lending platforms and mobile lending apps, collectively referred to as “digital lending,” have raised numerous significant issues with systemic implications. In order to support innovation while protecting data security, privacy, secrecy, and consumer protection, the legal framework must be well-balanced.

According to the RBI, banks are still in the early stages of lending digitally compared to physically (Rs. 1.12 trillion via digital mode versus Rs. 53.08 trillion via physical mode), whereas NBFCs account for a higher proportion of lending (Rs. 0.2 lakh via digital mode versus Rs. 1.93 lakh via physical mode).

In order to investigate consumer complaints concerning the rapidly expanding digital lending enterprises that have sprung up as a result of the epidemic, the RBI created a Working Group (WG) in January 2021.

The Reserve Bank of India (RBI) published the Digital Lending Standards, 2022, to regulate the credit facilities provided by such institutions in light of this background. The new rules are based on the notion that lending and credit facilitation operations can only be carried out by organisations that are either governed by the central bank or have a legal permission to do so.

In relation to digital lending products, REs are now required to provide a key fact statement (KFS) to the borrower before to the contract’s execution. The entire cost of digital loans, the terms and circumstances of the recovery mechanism, the specifics of the grievance redressal officer, and the cooling-off and look-up periods must all be included in KFS. Credit limits cannot be automatically increased without the borrower’s express, on-record agreement, according to the regulator. At any time throughout the loan’s lifetime, the borrower cannot be subjected to any fees, levies, etc. that are not listed in the KFS.

According to further criteria, REs are required to ensure that all lending done through Digital Lending Applications (DLAs), regardless of its nature or duration, is reported to Credit Information Companies (CICs). Additionally, CICs must be informed about the Buy Now Pay Later (BNPL) manner of lending.

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