RBI issues Digital Lending Guidelines: lays down norms on loan cost, customer protection, recovery, accountability of banks, NBFCs - details

The Reserve Bank of India (RBI) on Friday issued guidelines on digital lending, mandating the banks and financial institutions to put in place systems that would comply with the modified norms by 30 November 2022.

“…in order to ensure a smooth transition, Res (Regulated Entities) shall be given time till November 30, 2022, to put in place adequate systems and processes to ensure that ‘existing digital loans’ (sanctioned as on the date of the circular) are also in compliance with these guidelines in both letter and spirit,” an RBI release said.

The norms will apply for existing customers availing fresh loans and to new customers getting onboarded, the release said.

The circular further said that the regulated entities will remain liable for outsourcing arrangements they do with Lending Service Providers (LSP), Digital Lending Apps (DLA). It said that the bank and NBFCs/financial institutions must ensure that the DLAs and LSPs comply with the guidelines.

“It is reiterated that outsourcing arrangements entered by Regulated Entities (REs) with a Lending Service Provider (LSP)/ Digital Lending App (DLA) does not diminish the REs’ obligations and they shall continue to conform to the extant guidelines on outsourcing1. The REs are advised to ensure that the LSPs engaged by them and the DLAs (either of the RE or of the LSP engaged by the RE) comply with the guidelines contained in this circular,” the release said.

Last month, the central bank tightened norms for 'digital lending' to prevent charging of exorbitant interest rates by certain entities and also check unethical loan recovery practices, a PTI report said.   

Guidelines for digital lending - highlights

Customer Protection and Conduct requirements

Loan Disbursal, Servicing and Repayment - REs shall ensure that all loan servicing, repayment, etc., shall be executed by the borrower directly in the RE’s bank account without any pass-through account/ pool account of any third party. The disbursements shall always be made into the bank account of the borrower except for disbursals covered exclusively under statutory or regulatory mandate (of RBI or of any other regulator), flow of money between REs for co-lending transactions and disbursals for specific end use, provided the loan is disbursed directly into the bank account of the end-beneficiary. REs shall ensure that in no case, disbursal is made to a third-party account, including the accounts of LSPs and their DLAs, except as provided for in these guidelines.

Collection of fees, charges, etc.

1. Payment of Fees/Charges: REs shall ensure that any fees, charges, etc payable to LSPs are paid directly by them (REs) and are not charged by LSP to the borrower directly.

2) Penal Interest/ Charges: The penal interest/charges levied, if any, on the borrowers shall be based on the outstanding amount of the loan. Further, rate of such penal charges shall be disclosed upfront on an annualised basis to the borrower in the Key Fact Statement (KFS).

Disclosures to borrowers

1) Annual Percentage Rate (APR) - APR as all-inclusive cost of digital loans for the borrower shall be disclosed upfront by REs and shall also be a part of the Key Fact Statement.

2) Key Fact Statement: REs shall provide a Key Fact Statement (KFS) to the borrower before the execution of the contract in a standardised format for all digital lending products. The KFS shall, apart from other necessary information, contain the details of APR, the recovery mechanism, details of grievance redressal officer designated specifically to deal with digital lending/ FinTech related matter and the cooling-off/ look-up period.

3) Any fees, charges, etc which are not mentioned in the KFS cannot be charged by the REs to the borrower at any stage during the term of the loan.

Digitally signed documents – REs shall ensure that digitally signed documents viz KFS, summary of loan product, sanction letter, terms and conditions, account statements, privacy policies of the LSPs/DLAs with respect to borrowers data, etc shall automatically flow to the borrowers on their registered and verified email/ SMS upon execution of the loan contract/ transactions.

Link to website - REs shall ensure that DLAs of REs and LSPs have links to REs’ website with detailed information about the loan products, the lender, the LSP, particulars of customer care, link to Sachet Portal, privacy policies.

The guidelines mandate the banks and financial institutions to communicate to the borrower at the time of sanctioning of the loan and also at the time of passing on the recovery responsibilities to an LSP or change in the LSP responsible for recovery, the details of the LSP acting as recovery agent who is authorised to approach the borrower for recovery.