Industry says new digital lending norms to help them scale up, become more responsible

The digital lending industry, led by app-based credit suppliers, have welcomed the new set of regulations issued by the RBI, saying the move will help the sector scale up and become more responsible.

The Reserve Bank had on Wednesday tightened the norms for digital lending to prevent charging of exorbitant rates and to secure customer interest by checking unethical loan recovery practices.

Under the new norms, all loan disbursals and repayments are required to be executed only between the bank accounts of the borrower and regulated entities like banks and NBFCs without any pass-through/pool account of the lending service providers (LSPs).

Also, any fees or charges payable to LSPs in the credit intermediation process shall be paid directly by the regulated entities and not by the borrower, the Reserve Bank had said.

Welcoming the announcements, the Digital Lenders Association of India (DLAI) said the industry is very encouraged by the new regulations.

Being a forward-looking financial regulator that successfully balances the needs of financial innovation with the constraints of securing the integrity and stability of the financial system, the RBI has provided a nuanced blueprint that will help the digital lending ecosystem to continue to grow in a responsible and sustainable manner, it added.

At the same time, the RBI has clearly addressed the need to stamp out incipient trends that are antithetical to the best practices related to customer protection and data security, the association said in a statement on Thursday.

It also welcomed the now mandated collaboration between the financial and fintech ecosystems, saying it is the best way to scale and sustain impactful and inclusive financial services.

Lizzie Chapman of Zestmoney, who is also the president of DLAI, described the guidelines as extremely positive for both customers and fintech companies.

The guidelines make it abundantly clear that the RBI will not allow any regulatory loopholes to be exploited to build businesses. Overall, the recommendations are good news for serious and credible fintech companies who believe in scale against a backdrop of high levels of consumer protection, she said.

Brokerage Kotak Securities, in a note, said the new guidelines look a bit restrictive for existing players because there is greater focus on transparency, privacy and oversight for entities that are regulated by the RBI.

The key focus is still on protecting consumer interests, especially around transparency of loan pricing/fees, incorporating a free look-up period, avoiding over-indebtedness through assessment of repayment ability, ensuring customer consent for capture/storage of data, restricting access to mobile phone resources and incorporating policies on loan recovery mechanisms, it noted.

The report also pointed out that the RBI is silent on regulation of so-called digital banks or neo banks.

The direction of these regulations implies that lenders are likely to be a lot more careful in their partnerships with LSPs/fintechs. The restriction on access to mobile phone resources could require lenders/LSPs to explore other methods of assessing borrowers' creditworthiness, said the report.

Another brokerage Emkay Global said while the new guidelines focus on protecting customer from debt trap/data leakage, it is silent on capping borrower limits/pricing.

The new guidelines appear to be less taxing for the digital lending space from the draft guidelines, while they miss clarity on few other important aspects, including predatory pricing/capping of borrowers, and separate licence for digital lenders, said the report.

Swapnil Bhaskar of digital lender Niyo said the guidelines look promising for fintechs because even non-regulated entities are being recognized now through LSPs and digital lending agents.

Secondly, the guidelines seem quite customer-friendly in terms of transparency of the products. However, they may increase some tech and security cost for fintechs and also friction on user experience as there will be stricter controls on money movement and bureau reporting even for products like small ticket loans.

Sanjay Kao of fintech player Lentra said the norms will help smooth functioning of the lending ecosystem as they are progressive moves taken in the interest of customers that will reduce, if not outright eliminate, consumer mistreatment, privacy violation, and rampant KYC violations.

Simultaneously, the norms will compel lenders to reveal their data, credit assessments, and underwriting strategies and offer borrowers complete control over their personal data, which will go towards building customer confidence and increase their willingness to explore digital lending avenues, he said.