Digital lending in India has seen tremendous growth in recent years. Easy access to the internet and rising levels of aspirational consumerism have sparked this growth. The Reserve Bank of India (“RBI”) had constituted a working group on digital lending to explore regulation of the emerging sector in January 2021. The RBI later published its Guidelines on Digital Lending (“Guidelines”) in September 2022, based on the recommendations of the working group.
How digital lending works
Digital lending generally involves three parties – a lender, a lending service provider (including a digital lending platform) and a borrower. Most lenders in India are regulated by the RBI and include banks and non-banking financial companies. Digital lending platforms enable fluid and easy access to credit offered by such lenders to borrowers. In addition to customer acquisition, lending service providers also leverage their technical capabilities to perform other functions for lenders – including underwriting support, pricing support, loan servicing, loan monitoring and loan recovery.
Default loss guarantees
Some lending service providers also work with lenders to reduce financial risk of defaults by borrowers – through contractual arrangements called “default loss guarantees”. Default loss guarantees enable risk sharing between lenders and lending service providers – increasing financial inclusion by allowing lenders to extend loans to borrowers who they may not have otherwise lent to. Such default loss guarantee arrangements take place in accordance with RBI regulations which impose a 5% cap on the total amount of default loss guarantees which lending service providers can provide to a lender. The RBI’s regulations on default loss guarantees are a step in the right direction – especially since its working group on digital lending had actually intended to prohibit risk sharing of any form.
Fight against illegal digital lending platforms
Prior to the Guidelines, there were a plethora of predatory and illegal digital lending platforms in the market. Many of these predatory and illegal platforms preyed on borrowers by charging obscenely high levels of interest and penalties. Noting the cultural stigma against debt in India, some illegal digital lending platforms also exploited mobile phone data access to find ways to extort borrowers. With the Guidelines, the RBI has imposed strict information disclosure and data access restrictions to prevent such predatory and exploitative practices. The RBI also ordered the removal/blocking of thousands of illegal digital lending platforms. This has led to a transparent, accountable and legitimate digital lending ecosystem in India.
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JSA
Data protection
In addition to the data access restrictions above, the Guidelines require lenders to ensure that all data collected by their lending service providers is need based, done so with explicit, granular consent and stored only in India. Data localisation is nothing new for RBI regulated entities – which have had to store payments data in India since 2018. Data is the new oil in the eyes of the RBI, which is trying to create a secure data environment in India for all its regulated entities and their customers.
Fund flow restrictions
Notably, the Guidelines also introduced fund-flow restrictions with respect to loan disbursement and repayment – prohibiting third-parties (other than lenders and borrowers) from being in the flow of funds. This initially led to confusion regarding the role of payment aggregators in loan repayments. However, the RBI later clarified that a licensed payment aggregator that is not a lending service provider would be excluded from this restriction.
Grievance redressal
The Guidelines also introduced a requirement for a transparent grievance redressal mechanism available to borrowers with respect to digital loans. All lenders and their lending service providers are required to appoint nodal grievance redressal officers and resolve complaints within 30 days. Further, with the Guidelines, now borrowers can make complaints to the RBI not only regarding lenders, but also lending service providers – through the RBI’s Complaint Management System Portal.
Head of Legal
Jupiter
Future of regulation
The RBI recently published a draft framework to recognise self-regulatory organisations (“SROs”) for the financial technology (“FinTech”) sector in India – including digital lending. The draft framework seeks to address the RBI’s concerns relating to customer protection, data privacy, cyber security, grievance handling, internal governance and financial system integrity, while facilitating innovation and enabling FinTech companies to operate in a dynamic and flexible manner. Such SROs are to set, monitor and enforce baseline standards and rules of conduct codes for members, and notify the RBI of any statutory or regulatory violations by their members. SROs will also have the responsibility to guide the RBI on the extent, scope and manner of regulation of entities in the FinTech sector. This is a welcome move from the RBI and demonstrates its willingness to work with industry to build a successful FinTech ecosystem.
