RBI working committee’s recommendations are a step forward in addressing issues related to lack of transparency, data protection, and privacy, as well as user consent.
India’s fintech startups that had been in a bit of a quandary after the Reserve Bank of India’s (RBI) diktat on prepaid instruments and loans earlier this year, on Wednesday, welcomed the comprehensive rules on digital lending released by the central banker.
The RBI published the rules following the recommendations of a working committee on digital lending, divided into those that have been accepted for immediate implementation and those that have been accepted “in-principle, but require further examination".
“The RBI has demonstrated consumer centricity... we welcome the regulation,” Gaurav Chopra, founder and CEO of IndiaLends, an online lending platform provider, said in an email.
“Most new customers today are borrowing for the first time and a growing share is coming through digital channels. That’s where we believe a framework ensures responsible players are rewarded for working in the interest of the consumer,” Chopra added.
India’s fintech revolution is widely seen as a success at the scale of a billion people. Starting with UPI or the unified payments interface, India is adding financial infrastructure, including the accounts aggregator platform, and--in the broader, online commerce market--ONDC or the open network for digital commerce that has seen support from the world’s biggest tech companies, including Amazon and Microsoft.
The subcontinent is also seen as one of the most promising markets for financial products such as BNPL or ‘buy now pay later'.
Entrepreneurs like Chopra say the RBI working committee’s recommendations are a step forward in addressing issues related to lack of transparency, data protection, and privacy, as well as user consent.
The clarity on rules will “only boost consumer confidence and trust in the credit system and will allow players like us to continue our business without any changes to the business model,” Chopra says.
Some of the highlights of the rules are as follows: All loan disbursals and repayments are required to be made only between the bank accounts of the borrower and the regulated entity (like a bank or an NBFC) without any pass-through/pool account of the lending service provider (like a fintech startup) or any third party.
- Any fees or charges payable to the lending services provider in the credit intermediation process must be paid directly by the regulated entity and not by the borrower.
- A standardised key fact statement (KFS) must be provided to the borrower before executing the loan contract.
- An all-inclusive cost of digital loans in the form of annual percentage rate (APR) is required to be disclosed to the borrowers. APR shall also form part of KFS.
- Automatic increase in credit limit without explicit consent of borrower is prohibited.
- A cooling-off or look-up period during which the borrowers can exit digital loans by paying the principal and the proportionate APR without any penalty must be provided as part of the loan contract.
- Regulated entities must ensure that they and the lending services providers engaged by them have a suitable nodal grievance redressal officer to deal with fintech- or digital lending-related complaints. Such a grievance redressal officer must also deal with complaints against their respective digital lending apps.
- The details of the grievance redressal officer must be prominently indicated on the website of the regulated entity, its lending services providers and on the apps, as applicable.
- If any complaint lodged by the borrower is not resolved by the regulated entity within the stipulated period (currently 30 days), consumers can lodge a complaint under the Reserve Bank–Integrated Ombudsman Scheme.
- The new rules also specifically address data collected via digital channels. Data collected by digital lending apps should be need-based, should have clear audit trails and should be only done with prior explicit consent of the borrower.
- The option must be provided for borrowers to accept or deny consent for use of specific data, including option to revoke previously granted consent, besides option to delete the data collected from borrowers by the lending apps and lending services providers.
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Digital lending apps
Any lending sourced through any digital lending app–such as the many smartphone apps available today–is required to be reported to Credit Information Companies by the regulated entities irrespective of the nature or tenor of the loans.
All new digital lending products offered by regulated entities over merchant platforms involving short term credit or deferred payments are required to be reported to the credit information companies by the regulated entities.
Smartphone apps from fintech startups and banks have brought in innovation in the financial system, using data and tech to make the customer experience of borrowing simple, Saurabh Puri, chief business officer for credit cards at Zaggle, a fintech startup offering various financial services especially to corporate customers, said in an email.
Lenders and borrowers benefit from easy customer acquisition, credit assessment, loan approval, disbursement, repayment, and customer service. However, there are concerns that have emerged that include breach of data privacy, unfair business conduct, charging of exorbitant interest rates, and unethical recovery practices, Puri says.
The RBI’s rules will help mitigate these concerns, and bring in transparency and enhance customer confidence, he says.
“Overall, this will help the industry grow in an orderly fashion, encouraging innovation,” he adds.