Decoding RBI's Digital Lending Guidelines

With regulated digital platforms, more informed and smarter decisions could be made about getting digital credit

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Borrowing a collateral-free personal loan or a salary loan has become feasible and comparatively faster with the increasing prominence of digital lending apps in India. Although the decision remains with the borrowers to protect themselves from fraud or unethical practices caused which is caused due to fintech ecosystem being unregulated by the government.

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Fintech has not only been spurring financial inclusions but also has been operating unfairly by charging high-interest rates, immoral recovery procedures, data privacy violations, unethical practices and mis-selling. A recent report by the Reserve Bank of India (RBI) indicated that as of February 2021, 600 out of 1,100 lending apps operational in India are illegal.

This called out the need for RBI's interference in the online financial market. The recently released rules for digital lending aim to achieve transparency in the lending space as well as secure the interests of consumers. Below are the details mentioned, what they are, and how to protect your finances when you take a loan.

Who do the new RBI guidelines apply to?

The RBI has categorized digital lenders into the following:

  • Organizations coming under RBI regulations and are entitled to carry out lending business
  • Organizations not regulated by RBI but are entitled to lend as per regulatory or statutory provisions
  • Organizations that lend beyond the domains of regulatory or statutory stipulations

The first category of authorized lenders is the ones to which these latest digital lending guidelines will be applicable. These are also known as Regulated Entities (REs) and the Lending Service Providers (LSPs) who are involved with and engaged by them.

Decoding RBI's Digital Lending rules

Below are the guidelines that are classified under five sections for a better understanding:

Simplified process of availing loan

  • All loans can be disbursed and repaid between bank accounts and the RE without the involvement of a pool account or a third party
  • The RE is required to directly pay for the fees or charges due to LSPs during the process

Offer complete information about the cost of borrowing

  • Before signing and taking ahead a loan contract, a standardized Key Fact Statement (KFS) will be given to you about the digital credit product from RE
  • Through the Annual Percentage Rate (APR), you will also get information about the all-inclusive cost of the loan, which will also be a part of KFS.

Saving the interests of the customers

  • The RE cannot increase the credit limit until and unless clear consent is given by you
  • Without any penalty you will receive a cooling off or look-up interest period to exit the loan by paying off the principal amount and the proportionate APR

Addressing the complaints of customer

  • Nodal grievance redressal officers are easily available on the websites of the regulated entity and can be helpful in assessing you with any complaint about the digital lending product
  • If the complaint isn't resolved within 30 days by the RE, a complaint can be filed under the Reserve Bank – Integrated Ombudsman Scheme

Protecting the data of customers

  • Only if needed can the digital lending application can collect your data with explicit consent
  • Digital lending platforms or LSP have the permission to use your data, you can revoke the permission given anytime

In addition, according to RBI's regulatory framework for digital lending applications, they will now have to report all lending activities, deferred payments and short-term credit to credit information companies regardless of their nature or tenure.

Dos and don'ts for borrowers to follow

With these digital lending norms in place, trusting and borrowing credit from digital applications has become possible. Here are key practices to follow for a safer experience.

  • Do borrow digital loans only from registered organizations to protect from scams or prey
  • Don't get a digital loan till you see and properly understand the APR
  • Do look over the Key fact Statement before availing of a loan
  • Don't leave the opportunity to lay off a loan within the look-up period in case you find it ideal
  • Do keep track of who your nodal grievance redressal officer is, in case you want to file a complaint when you have an issue
  • Don't permit personal info if you don't feel it's right or couldn't understand
  • Do make sure that your loan borrowing isn't affecting your credit score
  • Don't get a loan till you actually need it or have a plan to repay it beforehand

With these regulated digital platforms, more informed and smarter decisions could be made about getting digital credit. These new RBI recommendations could help prevent digital lending scams and frauds by fraudsters. It would bring due diligence on the working of NBFCs or banks. Further, these safeguarding tools will connect legitimate digital lenders to the customers for quality services with hassle-free and affordable experience.