The Reserve Bank of India (RBI) issued the first set of guidelines to regulate digital lending on Wednesday in an effort to combat the growing number of online frauds and illegal activities.
According to the new rules, all loan disbursements and repayments must be made only between the borrower’s and the regulated entity’s bank accounts, with no pass-through or pool account of the lending service provider (LSP) or any third party.
The Reserve Bank’s regulatory framework is centred on the digital lending ecosystem of the RBI’s Regulated Entities (REs) and the Lending Service Providers (LSPs) that they engage to provide various permissible credit facilitation services.
In the case of entities authorised to lend under other statutory/regulatory provisions but not regulated by the RBI, the respective regulator/controlling authority may consider formulating or enacting appropriate digital lending rules/regulations based on the recommendations of the WGDL.
The WGDL has proposed specific legislative and institutional interventions for consideration by the Central Government for entities lending outside the purview of any statutory/regulatory provisions to curb the illegitimate lending activity carried out by such entities.
The Reserve Bank is statutorily mandated to operate the country’s credit system to its advantage. In this endeavour, the Reserve Bank has encouraged financial system, product, and credit delivery method innovation while ensuring orderly growth, maintaining financing stability, and protecting depositors’ and customers’ interests.
Recently, innovative methods of designing, delivering, and servicing credit products via the Digital Lending route have gained prominence. However, certain concerns have emerged that, if not addressed, may erode public trust in the digital lending ecosystem. Concerns primarily concern unbridled engagement of third parties, mis-selling, data privacy violations, unfair business practices, charging exorbitant interest rates, and unethical recovery practices.
In light of this, on January 13, 2021, the Reserve Bank established a Working Group on ‘digital lending, including lending through online platforms and mobile apps’ (WGDL).
The WGDL’s report was posted on the RBI website, inviting stakeholders and members of the public to comment. Taking into account the feedback from a diverse set of stakeholders, a regulatory framework has been developed to support the orderly growth of credit delivery via digital lending methods while mitigating regulatory concerns.
This regulatory framework is based on the principle that lending business can only be conducted by entities regulated by the Reserve Bank or entities authorised to do so by other laws.