The Reserve Bank of India (“RBI”), on 10th August 2022, released guidelines for digital lending (“Digital Lending Guidelines”) to provide a regulatory framework pertaining to lending activities conducted by FinTech and Digital Lending Applications (“DLA”). Based on the recommendations of the Working Group on ‘Digital Lending including Lending through Online Platforms and Mobile Apps’ (“WGDL”), the Digital Lending Guidelines have been framed to mitigate concerns 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.”
The Digital Lending Guidelines and framework involve entities regulated by the RBI (“RE”), the Lending Service Providers (“LSP”) engaged by the REs to extend various permissible credit facilitation services, the DLAs of REs and DLAs of LSPs engaged by REs.
For the purposes of the Digital Lending Guidelines, the RBI has adopted some recommendations of the WGDL for immediate implementation, while other recommendations have been accepted in principle but require further examination. In addition to the above, given the technical complexities involved, few recommendations have been listed for wider engagement with the government and stakeholders.
Key recommendations approved for immediate implementation
The recommendations approved for immediate implementation are mainly centered around consumer protection, data privacy, and regulatory framework.
Other key take-aways:
As noted above, RBI has approved certain recommendations that have been accepted in principle but require deliberation. These recommendations pertain to setting up of Self-Regulatory Organizations for governance of the digital lending industry. Other pertinent recommendations under consideration include discussions on prohibition of first-loan default guarantees, framing a regulatory framework for web-aggregator of loan product, ensuring measures related to data privacy and security at the end of SMS gateways before onboarding, audit of algorithms used for credit-scoring to prevent discriminatory outcomes, etc.
The FinTech and the digital lending space in India has grown rapidly in the last decade, playing a key role in allowing an alternate platform to borrowers. However, given the unprecedented growth, this sector was largely unregulated. The Digital Lending Guidelines provide much needed guidance for regulation, governance, and accountability of the players involved in the process of digital lending. The Digital Lending Guidelines adopt industry based best practices and provide for a robust framework for loan appraisal by providing adequate safeguards for ensuring consumer protection. These guidelines certainly are a step in the right direction as they strike the right balance in increasing consumer confidence while providing stability to REs, DLAs and LSPs. Implementation of recommendations that have been accepted in principle are also expected to further strengthen the regulatory framework for digital lending in the country.
Link to the Press Release pertaining to the Implementation of the recommendations of the Working Group on Digital Lending – https://rbidocs.rbi.org.in/rdocs/PressRelease/PDFs/PR689DL837E5F012B244F6DA1467A8DEB10F7AC.PDF
Link to the Report of the Working Group on Digital Lending including Lending through Online Platforms and Mobile Apps as well as the – https://rbidocs.rbi.org.in/rdocs/PublicationReport/Pdfs/DIGITALLENDINGF6A90CA76A9B4B3E84AA0EBD24B307F1.PDF
This article was first published on Saikrishna & Associates