With the emergence of innovative methods of designing and delivering credit products and their service through the digital lending channel, some concerns have also arisen which, if not mitigated, could shake people’s confidence in the digital lending ecosystem.
Some of the major concerns relate to third party engagement, mis-selling, charging exorbitant interest rates, unfair business conduct, unethical collection practices, breach of confidentiality data, etc
To ensure the protection of the interests of depositors and customers, the Reserve Bank of India (RBI), in its guidelines issued to all Commercial Banks, Primary (City) Co-operative Banks, State Co-operative Banks, District Central Co-operative Banks and NBFCs (including housing finance companies), reiterated that Regulated Entity (RE) obligations are not reduced by entering into outsourcing agreements with a Lending Service Provider (LSP)/digital lending application (DLA) and that REs will continue to comply with existing guidelines on outsourcing.
Among other instructions, the RBI issues guidelines on the following matters:
Annual percentage rate
According to the guidelines, lenders must inform borrowers of the annual percentage rate (APR), which is the effective annualized rate charged to the borrower of a digital loan. The cost and margin, including the cost of funds, the cost of credit and operating costs, processing fees, verification fees, maintenance fees, etc. should be included in the APR, while any charges such as criminal prosecution, late payment fees, etc. must be excluded.
In its guidelines, the RBI has instructed REs to ensure that all loan services, repayments, etc., will be executed by the borrower directly to the bank account of the RE without any intermediary account/credit pool account. ‘a third. Except for disbursements covered exclusively by statutory or regulatory mandate (from RBI or any other regulator), disbursements must always be made to the borrower’s bank account. REs should also ensure that under no circumstances is disbursement made to any third party account, including the accounts of LSPs and their DLAs, except as provided by RBI guidelines.
REs must ensure that all fees, charges, etc. payable to LSPs are paid directly by them (ER) and are not billed directly by the LSP to the borrower.
REs should also ensure that interest/penalty charges levied, if any, on borrowers are based on the outstanding loan amount. It should also be ensured that the rate of these penal charges is communicated in advance on an annualized basis to the borrower in the Key Fact Statement (KFS).
Period of reflection/research
Like insurance companies, ERs should also provide borrowers with a cooling-off/research period, i.e. a window of time should be given to borrowers for existing digital loans, to cancel an agreement loan, in case a borrower decides not to pursue the loan.
“The regulation regarding user consent for the storage and use of personal data is a welcome move. They comply with global standards such as the GDPR and our Personal Data Protection Bill which was tabled in Parliament in 2019. By requiring DLAs and LSPs to comply with these rules with immediate effect, the RBI ensures The financial services and fintech ecosystem are staying ahead of the curve when it comes to protecting sensitive personal data, even before it’s required by law. This will create immense consumer confidence in the ecosystem,” said Anurag Reddy, VP of Product and Chief of Staff, Dinero.
Dr. Ravi Modani, Founder and CEO of 121 Finance, said: “Regulation towards a better and more reliable future for all parties involved, be it lender or borrower, or LSPs. Digital lending regulations and guidelines through online platforms and mobile phones have brought a sense of security and trust among lenders and borrowers.
“With the issuance of the circular requiring all REs to take charge and report on every transaction, improper practices will automatically be eradicated from the system, making it more suitable for loan transactions of a clean nature. It now covers compliance for banking, housing, credit and factoring. The RBI has also defined LSP’s relationship with RE and made RE responsible for LSP’s conduct, which will protect the prospective borrower from harassment,” he added.
“RBI has covered the Factoring Regulation Act, which is a welcome move for a digital factoring company like ours,” Dr. Modani added.