RBI targets unfair methods in digital lending with new norms.

The Reserve Bank of India (RBI) issued the first set of guidelines for digital lending to crack down on illegal activities.

These guidelines are followed by a Working Group on Digital Lending recommendation.

Loans only through the Regulated Entities:
All loan disbursals and repayments will be required to be executed only between the borrower’s bank accounts and the Regulated Entities (RE)-such as a bank or a nonbanking financial company.
The Lending Service Provider (LSP) fee:
Any fees, charges, etc., payable to LSPs in the credit intermediation process shall be paid directly by RE and not by the borrower.
The Key Fact Statement (KFS):

A standardized Key Fact Statement (KFS) must be provided to the borrower before executing the loan contract.
All-inclusive cost of digital loans in the form of an Annual Percentage Rate (APR) is required to be disclosed to the borrowers.
Automatic increase in credit limit:
Automatic increase the credit limit without the explicit consent of the borrower is prohibited.
A cooling-off period:
A cooling-off/ look-up period during which the borrowers can exit digital loans by paying the principal and the proportionate Annual Percentage Rate (APR) without penalty shall be provided as part of the loan contract.
Complaint redressal mechanism:
As per extant RBI guidelines, if any complaint lodged by the borrower is not resolved by the Regulated Entities (RE) within Within the stipulated period (currently 30 days), he/she can lodge a complaint under the Reserve Bank – Integrated Ombudsman Scheme.

Data collection:
Data collected by Digital Lending Apps (DLA) should be need-based, have clear audit trails, and be only done with the prior explicit consent of the borrower.

It means lending through web platforms or mobile apps by taking advantage of technology for authentication and credit assessment.
Example-Farmart, Flexiloans.

Financial inclusion:
It helps in meeting the huge unmet credit needs, particularly in the microenterprise and low-income consumer segments in India.
Reduce Borrowing from informal channels:
It helps in reducing informal borrowings, such as money lenders, as it simplifies the process of borrowing.
Lower cost for the lender:
Since almost all activities take place in digital format, there is little investment in physical assets, such as buildings, reducing costs.
It can meet rural credit needs:
Since more than 50 per cent of the Indian population inhabits rural areas, most banks are in urban areas. Digital lending platforms might bridge this gap.

High charge of interest:
Some of the digital lending platforms charge excessive rates of interest and additional hidden charges.
Misuse of data:
There is a probability of misuse of customer data that customers provided during taking loans.
Acquiring customers:

Most platforms rely on credit reports and third-party underwriting systems to evaluate the risk profile of the customer.
The level playing field gives little room for aggressive play in terms of loan amount or interest rate eligibility.
May lead to rising NPA:
since there is no security or collateral for lending, the lender cannot confiscate the assets. It may further exacerbate the Non-Performing Assets (NPA) crisis.

Separate legislation should be enacted to oversee such lending.
Setup a nodal agency to vet the digital lending apps.
A Self-Regulatory Organization should be set up for participants in the digital lending ecosystem.
Develop certain baseline technology standards and compliance with those standards as a pre-condition for offering digital lending solutions.
Disbursement of loans should be made directly into borrowers’ bank accounts, and servicing of loans should be done only through the bank accounts of the digital lenders.
All data collection must require the prior consent of borrowers and come ‘with verifiable audit trails, and the data itself ought to be stored locally.

Pic Courtesy: inc42

Content Source: The Hindu