RBI’s Guidelines on Digital Lending

On August 10, 2022, the RBI issued, “Guidelines on Digital Lending” for banking and non-banking financial companies, in order to streamline the digital lending business model in India. With the rapid increase of digital lending during Covid-19,

it became imperative to secure the consumer’s interests. The new

guidelines, inter alia, are aimed at preventing the harassment faced by customers, and securing their personal data. However, there is a concern among fintech companies that the newly introduced strict norms are not in the interest of their business, and also inhibit start-up culture in their industry. The operational requirements under the new guidelines therefore, making it immensely difficult for the digital lenders and payment aggregators to do business in a way that their interests are always secure. This dichotomy between the consumer’s interest and flourishment digital lending business in light of the newly issued guidelines needs to be further explored in order to find a middle ground that benefits both the consumers and the companies.

The guidelines, prima facie, are aimed at curbing unfair and predatory lending practices, while providing technological frameworks strengthening privacy and data security. The RBI issued these restrictions as part of its responsibility to protect the market, considering how vulnerable the user base of India's digital lending is to predatory lending practices. As a result, these protections guarantee that customer faith in the banking and lending industries is upheld.

The aforementioned Guidelines are based on the report of the Recommendations of the Working Group on Digital Lending – Implementation dated August 10, 2022 received by the RBI.[2] It has been reiterated by the RBI, that outsourcing arrangements entered by Regulated Entities (REs) with a Lending Service Provider (LSP)/ Digital Lending App (DLA) does not diminish the REs’ obligations. According to the guidelines, any loan disbursals or repayments are to be executed only between the borrower’s bank accounts and the RE and the obligation to ensure that is with RE. Any fees charged by LSPs are to be paid by the RE to the LSP only. The LSP cannot charge any money from the consumer directly. REs need to prominently publish the list of LSPs or DLAs engaged by them and need to make sure that they do not store any of the consumers’ personal information. In addition to that, RBI should maintain digital privacy, regulatory frameworks and technological requirements of the LSPs or DLAs. Overall, the guidelines are considered to be consumer centric.

The criticism against these guidelines on grounds that it would increase the operational costs for digital lending business companies, and would further drive out small startups from this business is unwarranted, as they have been introduced for larger public interest. Especially during the times of Covid-19 pandemic when the economic stability of household families took a hit, Buy Now Pay Later (“BNPL”) companies adopted several methods to capitalise this opportunity and increase their business. Several reports noted cases of harassment by online lenders when requesting loan payback. These organizations and recovery agents have a reputation for using harsh tactics, including finding the borrowers' contacts, physically abusing them, and publicly humiliating them. The RBI has asked the REs to put in place suitable procedures and processes to stop the escalating instances of unethical recovery methods used by digital lenders. These will guarantee that payments won't be made to accounts belonging to third parties, including those of LSPs and their DLAs. Therefore, these Guidelines are to be considered necessary in the upcoming large digital lending business in India.