The Reserve Bank of India (“RBI”) had constituted a Working Group on ‘digital lending including lending through online platforms and mobile apps’ (“WGDL”) on January 13, 2021. The report by WGDL was released by RBI on November 18, 2021, inviting comments from stakeholders.

Taking into account the inputs received, on August 10, 2022, the RBI released its guidelines on digital lending (“DL Guidelines”) for immediate implementation. The DL Guidelines are applicable to RBI’s Regulated Entities (“RE”), their Lending Service Providers (“LSP”) and their Digital Lending Apps (“DLA”). Some highlights of the DL Guidelines are: 

1. Customer Protection and Conduct Issues 

• REs are required to make sure that loan servicing and repayments take place directly between the bank accounts of borrower and the RE, free from any pass-through or pool accounts from third parties. Additionally, the disbursements must go into the borrower's bank account.
• Any fees, charges, etc., payable to LSPs in the credit intermediation process shall be paid directly by RE and not by the borrower.
• In an attempt to increase transparency, the DL Guidelines also mandate a standardized Key Fact Statement (“KFS”) to be provided to the borrower before executing the loan contract.
• All-inclusive cost of digital loans in the form of Annual Percentage Rate (“APR”), which shall form a part of KFS, is required to be disclosed to the borrowers.
• REs are required to offer a cool off period during which borrowers can exit their digital loans by paying the principal and the proportionate APR without incurring any penalties.
• All LSPs engaged by REs must have a nodal grievance redressal officer to handle complaints regarding digital lending.
• The DL Guidelines also provide that if a borrower's issue is not resolved by the RE within the allotted time frame of 30 days, they may file a complaint with the Reserve Bank Integrated Ombudsman Scheme (RB-IOS).

2. Technology and Data Requirements

• Data gathered by DLAs must be need-based, have transparent audit trails, and be used exclusively with the borrower's express prior consent.
• Borrowers may be given the choice of accepting or declining consent for the use of certain data, as well as the ability to revoke previously granted consent, in addition to the choice of having their data deleted by the DLAs/LSPs.

3. Regulatory Framework

• For any lending sourced through DLAs, either those of the RE or of the LSP of the RE, REs are obligated to report such lending to credit information companies (“CIC”).
• The REs are also required to report to CICs any new digital lending products they issue to merchant platforms that involve short-term loans or deferred payments.

Additional recommendations that have been approved for immediate implementation can be accessed here. Recommendations of the WGDL that are acceptable to the RBI but require further consideration can be accessed here. Recommendations which still require wider engagement and deliberations with the Government and stakeholders can be accessed here. The DL Guidelines can be accessed here. 

Argus View:

The provisions in the DL Guidelines are quite comprehensive and serve a threefold purpose: 

• They regulate the entire digital lending process while mitigating regulatory concerns.
• They provide transparency to the borrowers. 
• They give importance to data privacy practices. 

A quick glance at the DL Guidelines makes it evident that they are extremely borrower friendly. For example, the prohibition on (i) collection of charges which are not mentioned in the KFS and (ii) automatic increases in credit limits without the borrower's explicit approval for each such increase, ensure that the borrowers are always kept updated regarding any decisions that could have an impact on them. Apart from this, prevention of unbridled engagement by third parties make the DL Guidelines seem to be a step in the right direction. However, the DL Guidelines require mandatory bureau reporting even for products like ‘buy now pay later’, which may increase costs for the lenders and restrict the flow of money.

This update has been contributed by Vinod Joseph (Partner) and Anushkaa Shekhar (Associate).

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