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Digital lending norms: Direct credit to a/c, sans third party

Aiming to curb rising malpractices in the digital lending ecosystem, the Reserve Bank of India (RBI) on Wednesday issued guidelines for entities engaged in digital lending, with the norms stating that all digital loans must be disbursed and repaid through bank accounts of regulated entities only, without pass-through of lending service providers (LSPs) or other third parties.

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The norms follow the recommendations of a working group for digital lending, whose report was made public last November. “The concerns primarily relate 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 central bank said in the final guidelines.

The regulator classified digital lenders into three categories: entities regulated by the RBI and permitted to carry out lending business, entities authorised to carry out lending as per other statutory or regulatory provisions but not regulated by the RBI, and entities lending outside the purview of any statutory or regulatory provisions.

The latest regulatory framework is focussed on the digital lending ecosystem of RBI’s regulated entities (REs) and the LSPs engaged by them to extend credit facilitation services. As for entities falling in the second category, the respective regulator may consider formulating rules on digital lending, based on the recommendations of the working group, the RBI said. For entities in the third category, the working group has suggested specific legislative and institutional interventions for consideration by the government to curb illegitimate lending.

Apart from direct disbursals and repayments of digital loans, the norms mandate that any fees or charges payable to LSPs in the credit intermediation process shall be paid directly by the RE and not by the borrower.

A standardised key fact statement (KFS) must be provided to the borrower before executing the loan contract. The all-inclusive cost of digital loans in the form of annual percentage rate (APR) will have to be disclosed to borrowers. The APR shall also form part of KFS. Automatic increases in credit limit without the explicit consent of borrowers has been prohibited. The loan contract must provide for a cooling-off or look-up period during which borrowers can exit digital loans by paying the principal and the proportionate APR without any penalty.

All digital lending products extended by REs over merchant platforms involving short term credit or deferred payments must also be reported to credit bureaus by the REs.


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