What are RBI’s new Digital Lending Norms and How it may change the way Digital Loans Work? - Explained

RBI’s new Digital Lending Norms: Reserve Bank of India announced new digital lending rules or norms to regulate digital loans and check malpractices. Let’s understand what are RBI’s new digital lending rules and why Central Bank has introduced them.

RBI’s new Digital Lending Norms
RBI’s new Digital Lending Norms

RBI’s new Digital Lending Norms: Reserve Bank of India announced new digital lending rules or norms to regulate digital loans and check malpractices. The announcement of RBI’s new norms for digital lending comes at a time when the sector has been reporting increased number of cheating and malpractices. Let’s understand what are RBI’s new digital lending rules and why Central Bank has introduced them.

Why Digital Lending Rules?

The new framework announced by RBI to manage Digital Lending Ecosystem is based on the recommendations of a working group for digital lending which was released in November 2021. The report submitted by the working group highlighted the following challenges or concerns that plague the digital lending sector:

  • Unrestricted Engagement of Third Parties
  • Mis-selling of loan / lending instruments
  • Data Privacy concerns for the customers
  • Unfair Business Conduct
  • Exorbitant Interest Rates
  • Unethical Recovery Practices

Click Here to Read the Official Notification

Different types or Classification of Digital Lenders

RBI’s new digital lending norms classify digital lenders into three key categories:

  1. Lending entities regulated by RBI and permitted to carry out lending business
  2. Lending entities that are not directly regulated by RBI but authorized to carry out lending rates as per other statutory/regulatory provisions
  3. Lending entities that operate outside any regulatory framework or provisions

The rules announced by the Central Bank are applicable only to the type 1 lending entities that are directly regulated by the RBI. For the Type 2 lenders, their own regulators can appoint rules for management of digital loans while for Type 3 lenders government would be required to bring in a new law.

Key Highlights from RBI’s new Digital Lending Mandates / Norms

  • Disbursals and Payment Directly to Account: The new rules specified by RBI has made it mandatory for all loan disbursals and repayments to be executed directly between the bank accounts of borrower and the Regulated Entity (RE). No pass-through payment via Pool Account or Lending Service Providers (LSPs) or third party is allowed.
  • LSP Fee to be paid by RE: RBI also mandates that any fee or charges that is to be paid to Lending Service Providers (LSP) that are to be paid as part of the credit intermediation process will be borne and paid directly by the Regulated Entity (RE) and not the borrower.
  • Key Fact Statement: All borrowers will have to be provided with a standardized Key Fact Statement (KFS) prior to the execution of the loan contract.
  • Annual Percentage Rate Disclosure: Borrowers or customers are to be intimated about the Annual Percentage Rate (APR), which will be inclusive of all fees and cost of the digital loan.
  • No Auto Increase of Credit Limit: Regulated Entity is not allowed to executive automated increase in the credit limit of the borrower without their explicit consent.
  • Cooling Off Period: All digital loans should come with a cooling-off/ look-up period during which borrowers will have the option to pay the principal and the proportionate APR without any penalty. This period should be clearly mentioned in the loan contact.
  • Grievance Redressal Officer: All Regulated Entities and their appointed LSPs are required to appoint a nodal grievance redressal officer to deal with FinTech/ digital lending related complaints.
  • Data Collection After Consent: Any and all data which will be collected by DLAs should be need based and should have clear audit trails. The data should also be collected with prior explicit consent of the borrower.
  • Reporting to CICs: Any lending sourced through Digital Lending Apps (DLAs) is required to be reported to Credit Information Companies (CICs) by REs irrespective of its nature or tenor.
  • Window to Resolve Complaints: Any complaints filed by a borrower has to be resolved by the RE within 30 days / stipulated timeframe. In case RE fails to do so, the borrower can lodge a complaint under Reserve Bank - Integrated Ombudsman Scheme (RB-IOS).

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