In the era of growing fintech companies, the option of availing loans on zero interest rates or BUY NOW PAY LATER mode are increasing at fastest pace. Companies such as Zest Money, Simpl etc., are giving credit facilities to general public to avail loans and repay the money in various monthly installments that too with no interest cost sometimes. These Fintech companies are attracting customers through offering unique credit products which are customized to the requirements of a specific user. As per reports, these Companies used alternative data for credit assessment of its customers and devised completely digital customer onboarding and loan disbursement processes.
The question therefore arises that whether these companies has legitimate rights to lend money in market or is there any authority who are regulating them. It can be stated that, although only banks and licensed NBFCs has access to capital and legal rights to lend money in market so in order to enter into lending business these fintech companies had to enter into partnerships with such lenders who outsourced customer acquisition, portfolio monitoring, and loan recovery functions to them.
While availing the benefits of these bonanza offers, customers sometimes landed themselves in a drastic position, which results into exorbitant penalties and humiliation by these lending apps in case of delay in payments. To stop all such practices, The Reserve Bank of India intervene and issued guidelines for 'Digital Lending'.
The Reserve Bank of India ('RBI') on the basis of recommendations of the working group set up by the RBI last year to study the market practices followed in the digital lending industry issued Notification RBI/2022-23/11, DOR.CRE.REC.66/21.07.001/2022-23, dated September 02, 2022, wherein Guidelines for Digital Lending are implemented to streamline and regulate loans given by NBFCs including Housing Finance Companies, all Commercial Banks and Primary (Urban) Co-operative Banks, State Co-operative Banks, District Central Co-operative Banks ('Hereinafter referred as 'Regulated Entity'). The RBI had said that outsourcing arrangements of regulated entities (banks and NBFCs) with Credit Service Providers (LSPs)/Digital Loan Apps (DLAs) do not reduce their obligations.
Let us examine and decode these regulations in simple manner to understand the measures taken by RBI in order to curb the malpractices and harsh recovery methods used by these digital lending apps.
It is important to note that the guidelines are mandatory in nature and shall be applicable to the 'existing customers availing fresh loans' and to 'new customers getting onboarded'. However, to ensure a smooth transition, Regulated Entities are given time till November 30, 2022, to put in place adequate systems and processes to ensure that 'existing digital loans' are also in compliance with these guidelines in both letter and spirit.
Before getting into the integrities of these guidelines issued by RBI on Digital lending, lets first understand the basic definitions of the most used buzz words in money lending industry:
1. Annual Percentage Rate (APR)
APR is the effective annualised rate charged to the borrower of a digital loan. APR shall be based on an all-inclusive cost and margin including cost of funds, credit cost and operating cost, processing fee, verification charges, maintenance charges, etc., and exclude contingent charge like penal charges, late payment charges, etc.
2. Digital Lending
A remote and automated lending process, largely by use of seamless digital technologies for customer acquisition, credit assessment, loan approval, disbursement, recovery, and associated customer service.
3. Digital Lending Apps/Platforms (DLAs)
Mobile and web-based apps with user interface that facilitate digital lending services. DLAs will include apps of the Regulated Entities (REs) as well as those operated by Lending Service Providers (LSPs) engaged by REs for extending any credit facilitation services in conformity with extant outsourcing guidelines issued by the Reserve Bank.
4. Lending Service Provider (LSP)
An agent of a Regulated Entity who carries out one or more of lender's functions or part thereof in customer acquisition, underwriting support, pricing support, servicing, monitoring, recovery of specific loan or loan portfolio on behalf of REs in conformity with extant outsourcing guidelines issued by the Reserve Bank.
Every Regulated entity shall ensure that all loan disbursement and payments would need to be made only between the bank accounts of the borrower and the regulated entities. There is no need to use the 'pool' account of the loan service providers. Regulated entity shall ensure that there is no automatic increase in credit limit unless explicit consent of borrower is taken on record for each such increase.
With the view to protect the interest of investors, Regulated entity shall communicate to the borrower, at the time of sanctioning of the loan and also at the time of passing on the recovery responsibilities to an Lending service provider or change in such Lending Service provider responsible for recovery, the details of the Lending service provider acting as recovery agent who is authorised to approach the borrower for recovery.
Regulated entities shall ensure that they and the Lending service provider engaged by them shall have a suitable nodal grievance redressal officer to deal with FinTech/ digital lending related complaints/ issues raised by the borrowers. Such grievance redressal officer shall also deal with complaints against their respective lending apps. Contact details of grievance redressal officers shall be prominently displayed on the websites of the Regulated entity, its Lending Service Provider and on Digital lending apps and also in the agreement provided to the borrower, if any. Further, the facility of lodging complaint shall also be made available on the Digital lending apps and their respective websites. It is reiterated that responsibility of grievance redressal shall continue to remain with the Regulated Entity.
If any complaint lodged by the borrower against Regulated Entity or the Lending Service Provider engaged by the Regulated Entity is not resolved by the such regulated entity within the stipulated period (currently 30 days), he/she can lodge a complaint over the Complaint Management System portal under the Reserve Bank-Integrated Ombudsman Scheme (RB-IOS). For entities currently not covered under RB-IOS, complaint may be lodged as per the grievance redressal mechanism prescribed by the Reserve Bank.
Also, it shall be the duties of all Regulated entities to ensure that any lending including Lending through the Buy Now Pay Later (BNPL) mode done through their Lending Apps and/or Mobile Apps of Lending Service Providers is reported to Credit Information Companies irrespective of its nature/ tenor.
Through these guidelines, RBI has taken initiative to stop unethical practices, exorbitant interest rates and excessive financial product being offered by these lending apps to customers. Also, in order to protect the data of customers, RBI has mandated that Data collected by digital lending apps must be need-based, with the borrower's prior consent, and can be audited if required.
CAclubindia
