A regulatory framework has been made available by the banking authority for fintech companies.
The Reserve Bank of India (RBI) has rolled out a new regulatory framework for digital lending. The set of regulations is applicable to any lending service providers (LSP) that these entities work with as well as the entities that the banking regulator regulates.
When the banking authority issued a directive to non-banking fintech companies in June of this year that the prepaid payment instruments master directions do not permit the loading of prepaid payment instruments from credit lines, everything got started. And it had an instant effect. As opposed to 5-7 lakh in May, these companies now only issue less than one lakh new prepaid cards per month.
At the time, the freedom that fintech firms implicitly benefited from was perceived as their misreading of the RBI's master directives, leading the players in the field to believe that the urgent need for a solid regulatory framework. So, here it is now!
It is crucial to note that the Reserve Bank established a Working Group on "Digital Lending," which includes lending through online platforms and mobile apps, on January 13, 2021. (WGDL). And after a number of proposals from various stakeholders were included into the working group, these rules were born.
“This regulatory framework is based on the principle that lending business can be carried out only by entities that are either regulated by the Reserve Bank or entities permitted to do so under any other law,” stated the RBI.
To safeguard borrowers
The banking regulator has categorically mentioned that any fees or charges, etc that are payable to the LSP in the process of credit intermediation will be paid by the regulated entities directly and not by the borrower.
Additionally, the RBI made it clear that all loan disbursements and repayments will take place directly between the bank accounts of the borrower and the regulated firms, without the use of a pool account maintained by an LSP or other third party.
It’s mandatory for the lender to provide standardised Key Fact Statement (KFS) to the borrower before executing the loan contract, when a borrower takes loan.
Something that will come as a relief to borrowers is that automatic increase in credit limit without explicit consent of the borrower will now be prohibited.
Borrowers will now be given an opportunity to avail a cooling off period during which they can exit digital loans by paying the principal and the proportionate APR without any penalty as part of the loan contract.
The regulated companies would see to it that there is a nodal grievance officer in place at the loan service providers to handle complaints. The contact information for these grievance officials must be widely displayed on the websites of both these organisations and loan service providers.
If the borrower's complaint is not resolved within 30 days, they will have the option to escalate it to the Ombudsman.
The players in the industry applaud the regulations as a positive development.
While commending the latest regulations, Vishal Dhawan, Founder of Plan Ahead, an investment advisory firm, says, “The benefit of an explicit consent of the borrower is that credit behaviour of the investor can be controlled, as the investor has the ability to actively decide whether or not he wants access to more debt, and whether his financial position permits him /her the additional burden of interest.”
“We welcome the digital lending guidelines announced by the RBI. We see these guidelines as extremely positive measures for customers and thereby fintech companies who follow industry best practices. Specific to digital lending, we also believe the guidelines make it abundantly clear that India will not be a market where regulatory loopholes can be exploited to build businesses,” said Lizzie Chapman, CEO & Co-founder, ZestMoney and President, Digital Lenders Association of India (DLAI).
“Overall, the recommendations identified for implementation is good news for serious and credible fintech companies who believe in scale against a backdrop of high levels of consumer protection,” she added."