RBI publishes strict standards for digital loans

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The Reserve Bank of India (RBI) said in its long-awaited rules for the segment, announced on Wednesday, that all digital loans must be granted and repaid only through the bank accounts of regulated companies, without transmission from loan service providers ( LSP) or any third party.

The rules, which aim to reduce the escalation of abusive practices in the digital lending ecosystem, are based on suggestions from a Digital Lending Task Force, whose report was made public in November 2021. The issues primarily relate to unfettered third-party participation, mis-selling, data privacy breaches, unfair business practices, excessive interest rates and unethical clawback tactics,” the RBI said in the final recommendations.

The RBI has divided digital lenders into three categories: entities regulated by the RBI and authorized to engage in lending activities, entities authorized to engage in lending under other laws or regulations but not regulated by the RBI, and entities lending outside the scope of any legislative or regulatory provision. provisions. The most recent regulatory framework focuses on the digital lending ecosystem of RBI Regulated Businesses (REs) and LSPs they contract to provide credit facilitation services.

The RBI said that for companies in the second category, the appropriate regulator could consider developing digital lending guidelines based on the task force’s suggestions.

In addition to direct disbursements and repayments of digital loans, the standards stipulate that any fees or charges payable to financial service providers in the process of credit intermediation must be paid directly by the RE and not by the borrower.

According to the Digital Lenders’ Association of India (DLAI), the rules provide a sophisticated framework that would help the digital lending ecosystem grow in a responsible and sustainable manner. “At the same time, the RBI has clearly responded to the need to weed out emerging trends that run counter to best practices related to customer protection and data security,” DLAI said in a statement. “We also look forward to engaging with the RBI in the coming months as the industry moves towards forming an SRO (self-regulatory body) to promote compliance with these recommendations.”

Before entering into the loan agreement, the borrower must receive a standardized statement of key facts (KFS). Borrowers should be informed of the total cost of digital loans in the form of an annual percentage rate (APR). The APR must also be included in the KFS. Automatic increases in credit limits without explicit permission from debtors have been prohibited.

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“Specifically, the Key Facts Statements (KFS) and express consent measures introduced today should ensure the required transparency and instill confidence in the system. Clarity on the disbursement of the money transfer directly to the customer’s bank account was essential,” said Ranvir Singh, Founder and Managing Director.

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