RBI issues new guidelines on digital lending to protect borrowers

The Reserve Bank of India (RBI) announced the guidelines on digital lending. The central bank has given regulated entities (RE) till November 30th to put in place adequate systems and processes to ensure that ‘existing digital loans’ comply with fresh lending guidelines.

The new norms are applicable to both ‘existing customers availing fresh loans’ and to ‘new customers getting onboarded’. These have come into effect from today onward.

RBI said, “it is reiterated that outsourcing arrangements entered by Regulated Entities (REs) with a Lending Service Provider (LSP)/ Digital Lending App (DLA) does not diminish the REs’ obligations and they shall continue to conform to the extant guidelines on outsourcing.”

As per the guidelines, all loan disbursals and repayments are required to be executed only between the bank accounts of the borrower and the RE without any pass-through/ pool account of the LSP or any third party. Meanwhile, an automatic increase in credit limit without explicit consent of the borrower is prohibited.

Also, RBI directed that any fees, charges, etc., payable to LSPs in the credit intermediation process shall be paid directly by RE and not by the borrower. Further, a standardized Key Fact Statement (KFS) must be provided to the borrower before executing the loan contract.

Additionally, 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.

The REs are advised to ensure that the LSPs engaged by them and the DLAs (either of the RE or of the LSP engaged by the RE) comply with the guidelines contained in this circular.

Further, RBI advised that the instructions contained in this circular shall be applicable to the ‘existing customers availing fresh loans’ and to ‘new customers getting onboarded’, from the date of this circular.

However, in order to ensure a smooth transition, RBI said, “REs shall be given time till November 30, 2022, to put in place adequate systems and processes to ensure that ‘existing digital loans’ (sanctioned as on the date of the circular) are also in compliance with these guidelines in both letter and spirit.”

The new guidelines on digital lending come after concerns primarily related to unbridled engagement of third parties, mis-selling, breach of data privacy, unfair business conduct, charging of exorbitant interest rates, and unethical recovery practices.