RBI’s updated guidelines for digital lending take effect on December 1st.

by Mapping Returns

The Reserve Bank’s (RBI) updated digital lending standards went into effect on Thursday with the intention of shielding customers from the excessive interest rates certain businesses charge while also preventing unethical loan recovery techniques.

According to the new regulations, there cannot be any pass-through or pool accounts of the Lending Service Providers and all loan disbursements and repayments must be performed only between the borrower’s bank account and the regulated organisations (such as banks and NBFCs) (LSPs).

Additionally, the Reserve Bank announced in a press release stating the regulation stance that “any fees, charges, or other payments owed to LSPs in the credit intermediation process will be paid directly by RE and not by the borrower.”

According to V Swaminathan, executive chairman of Andromeda Loans, since digital loans and online repayments have become more popular since the pandemic, capable systems and processes are needed to further strengthen data privacy and security of private information shared between clients and regulated entities.

We need to trust the central bank as it addresses governmental issues and consumer complaints related to digital lending platforms, such as the use of arbitrary collection strategies, he said, even though the cost of compliance may be significant for companies that haven’t updated their core business models.

The RBI indicated when the rules were released in August that they applied to both “new consumers becoming onboarded” and “current customers availing new loans.”

Anil Pinapala, CEO and Founder of Vivifi Finances, claims that the RBI has standardised cost disclosures with a common Key Fact Statement (KFS) that provides information on an all-in APR (Annual Percentage Rate) that takes into account all fees and interest charged to customers, enabling them to compare this rate across banks and NBFCs.

According to Pinapala, the RBI’s decision would protect clients and level the playing field. “Licensed and compliant businesses will have an advantage over fintechs with other NBFC alliances, and are expected to witness increased market share in the future,” he added.

According to Nageen Kommu, Founder & CEO of Digitap, the RBI’s recommendations on digital lending are a crucial advancement in the credit ecosystem given the rapid proliferation of sophisticated credit tools and the country’s progressive financial inclusion imperative.

“The rules are meant to address issues like deceptive financing practises, third-party involvement, mis-selling, and data privacy. Fintech players have been seen adjusting their business models as needed to comply with the RBI’s rules. Several participants have revised their terms of agreements and related procedures “Kommu said.

In a comprehensive set of guidelines for digital lending, the RBI stated that the main issues were the unrestrained involvement of third parties, mis-selling, data privacy violations, unfair business practices, the imposition of exorbitant interest rates, and unethical recovery techniques.

A working group on “digital lending, including lending through online platforms and mobile applications” was established by the RBI on January 13, 2021. (WGDL).

The RBI’s Regulated Entities (REs) and Lending Service Providers (LSPs), whom they work with to offer a variety of legal credit facilitation services, are at the centre of the regulatory framework for the Reserve Bank’s digital lending ecosystem. The new regulations forbid automatic credit limit increases without the borrower’s express permission.

In order to manage complaints relating to FinTech/digital lending, RBI-regulated firms must make sure that they, as well as the LSPs they hire, have a suitable nodal grievance redressal officer.

“The complaints against their respective DLAs will also be handled by these grievance redressal officers. The RE’s website, its LSPs, and any applicable DLAs must prominently display the contact information for the grievance redressal officer “The rules said.

Digital Lending Apps (DLAs) are user-friendly mobile and web-based applications that let borrowers borrow money from online lenders. Apps run by REs as well as LSPs engaged by REs to offer credit facilitation services will be included in DLAs.

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