With the proliferation of Fintechs and other non-banks becoming active in digital lending (DL), there were regulatory issues in the process of performing lending activities, most importantly in setting terms of engagement outsourcing to third parties, mis-selling, breach of data privacy, unfair business conduct, charging exorbitant interest rates, using unethical recovery methods and harassment of borrowers.
With technology central to financial intermediation, DL is evolving as a key business differentiator in lending to the informal sectors benefiting micro, small and large enterprises and individuals. In the absence of uniformity, each regulated entity (RE) adopts its own processes.
Thus, DL is emerging as a remote and automated lending process using seamless digital technologies for customer acquisition, credit scoring, loan approval, disbursement, collections, and related customer service. Through DL, some of the REs may use outsourced agents for a fee to undertake some of the activities involved in providing digital credit to beneficiaries and recovering loans.
These agents may perform one or more of the lender’s functions in customer acquisition, underwriting assistance, pricing assistance, disbursement, servicing, monitoring, collection, loan collection, often they use harsh methods to collect the loans. Borrower complaints are mounting against debt collectors adopting unethical and socially unacceptable practices used by some of the loan collectors. RBI wanted to eliminate these unsound loan collection practices.
1. DL Standard Standards:
Based on the working group set up by the RBI on “digital lending, including lending via online platforms and mobile apps”, RBI is poised to strengthen the DL process to standardize and institutionalize best practices while mitigating regulatory concerns for the broader benefit of all stakeholders. These standards will apply to all REs, other entities authorized to lend under statutory provisions but not regulated by the RBI and entities authorized to lend outside the scope of any statutory/regulatory provision under any other law.
The new regulations are focused on REs and Lending Service Providers (LSPs) and aim to prohibit illegitimate lending activities. DL is largely based on mobile and web apps with a user interface that makes it easy to borrow through a digital lender. Digital Lending Applications (DLAs) will include applications from REs as well as applications operated by LSPs that are contracted by REs for the extension of any credit facilitation service.
Annual Percentage Rate (APR) must be obtained on loans using an appropriate algorithm built into DLAs for borrowers based on an all-inclusive cost and margin, including cost of funds, cost of credit and operating fees, processing fees, verification fees, maintenance fees, etc., except for possible charges such as criminal prosecution, late payment fees, etc. The APR should be part of the Key Fact Statement (KFS) to be shared with the potential borrower.
RBI intends to shape DL governance in the financial system to protect the interests of key stakeholders – the borrowers who benefit from these services. It is set to bring greater transparency in DL operations, prescribe high disclosure standards and protect customers in the public interest. REs must ensure that their LSPs adhere to regulatory standards and follow a disciplined mode of service delivery to borrowers. Managing operational risk in implementing these standards will be difficult.
2. Incremental DL improvements:
In order to calibrate the institutionalization of a better DL ecosystem by REs, the proposed improvements have been grouped into three segments. (i) Agreed for immediate implementation (ii) Agreed in principle but requiring further consideration before making them mandatory (iii) Recommendations requiring GOI consideration. Each group of recommendations/developments has been subdivided into measures designed for (a) customer protection and conduct requirements (b) technology and data requirements (c) regulatory framework and (d) legal framework and institutional. Clearly, all standardization of DL operations is focused on promoting transparency, protection of borrowers, and sustainability of DL operations.
3. Standards for immediate implementation:
- All loan disbursements and repayments shall be executed only between the Borrower’s bank accounts and the RE without any relay/pool accounts of the LSP or any third party.
- All fees, charges, etc., payable to LSPs in the process of credit intermediation must be paid directly by the RE and not by the borrower.
- The KFS must be provided to the borrower in advance before the execution of the loan agreement indicating therein the all-inclusive cost of digital loans – APR.
- Automatic increase of the credit limit without the express consent of the borrower is prohibited.
- A trial period of the product in the form of a cooling off/research period during which borrowers can exit digital loans by paying the principal and proportional APR without any penalty should be provided as part of the contract loan.
- REs should ensure that they and the LSPs they have engaged have an appropriate nodal grievance officer to handle complaints related to FinTech/digital lending. This grievance officer should also handle complaints against their respective DLAs.
- Contact details for the Grievance Officer must be prominently displayed on the ER’s website, its LSPs and DLAs, as applicable.
- In accordance with current RBI guidelines, if a complaint made by the borrower is not resolved by the ER within the specified time period (currently 30 days), the borrower may file a complaint with the Reserve Bank – Integrated Ombudsman Scheme (RB -IOS)
- Data collected by DLAs should be needs-based, should have clear audit trails, and should only be done with the prior explicit consent of the borrower.
- The option may be offered to borrowers to accept or deny consent to the use of specific data, including the option to revoke previously granted consent, in addition to the option to delete data collected from borrowers by the DLAs/LSPs.
- Any loan obtained through DLA (either the RE or the LSP engaged by the RE) must be reported to Credit Reporting Companies (CICs) by the REs, regardless of its nature or nature. content.
- All new digital lending products extended by REs on merchant platforms involving short-term credit or deferred payments must be reported to CICs by REs.
4. Way forward:
These guidelines, when viewed with those accepted in principle and those to be initiated by the government, should combine to reform the DL ecosystem into industry best practices. Once REs and LSPs integrate these guidelines into their day-to-day DL operations, institutionalize operational risk management controls, DLAs can also be recalibrated to meet new demands for better governance and better risk management. risks. DL practices that have evolved with the technology currently in use could be consolidated into intelligent standards-compliant DL entities. When these are streamlined, potential borrowers will not hesitate to use the DL mode to borrow and repay loans on time and thereby improve micro and small businesses. Client protection and fair treatment of borrowers in loan recovery are hallmarks of DL reforms.
The opinions expressed above are those of the author.
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