The Reserve Bank of India (“RBI”) on June 24, 2020 issued a notification bearing no. RBI/2019-20/258 (“Notification”) addressed to banks and non-banking financial companies (“NBFC”) showing concerns over adherence to fair practice code and outsourcing guidelines on the lending through digital lending platforms.
Highlights of the Notification:
1. The RBI observed that the banks and NBFCs are offering hassle free loans through digital lending platforms either directly or through an outsourcing arrangement. However, the digital lenders often do not disclose the backend lenders and portray themselves as lenders instead. Due to this reason, customers are unable to access the grievance redressal mechanism available to them under the regulatory framework. Various customers have complained to the RBI about the exorbitant interest rates, non-transparent methods to calculate interest, harsh recovery measures, unauthorised use of personal data and bad behaviour.
2. The RBI noted that while such credit intermediation is a welcomed step, banks and NBFCs have been violating the extant guidelines on outsourcing of financial services and Fair Practices Code, etc., as there is a lack of transparency in transactions. The RBI re-iterated that such guidelines must be adhered to meticulously regardless of such lending activity taking place directly or through outsourcing of financial and information technology services.
3. The RBI further noted that outsourcing lending activity does not in any way diminish the obligation of banks and NBFCs and wherever such lending is outsourced to a digital lending platform, the following must be adhered to:
i. names of such digital lending platforms shall be disclosed on the website of banks and NBFCs;
ii. such digital lending platforms shall be directed to disclose the name of the bank or NBFC on whose behalf they are interacting, upfront to the customer;
iii. sanction letter shall be issued on the letterhead of bank or NBFC after the sanction of the loan but before the execution of loan agreement;
iv. a copy of the loan agreement along with all the enclosures mentioned in the loan agreement at the time of sanction or disbursement of loan;
v. banks and NBFCs shall ensure effective oversight and monitoring on such digital lending platforms; and
vi. banks and NBFCs must take steps towards increasing awareness of grievance redressal mechanisms.
4. RBI further warned that any violation in this regard shall be viewed seriously.
Conclusion:
Digital lending has become a common practice especially since the lockdown. While this notification does not penalise banks and NBFCs, they may be required to revisit their outsourcing arrangements. The main concern of the RBI emanates from lack of grievance redressal mechanism available to the customers and lack of transparency on digital lending platforms. Banks and NBFCs will be required to make their digital websites and applications compliant with the notifications specially with respect to full disclosure about their outsourcing arrangements.
Read Notification here.
This update has been contributed by Pratish Panjabi (Partner) and Shivani Agarwal (Associate).
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