The digital lending industry of India has prospered with a booming upswing in the past few years. The sector’s exponential growth and skyrocketing users led to a facilitation of digital loans worth $2.2 billion. But with great power comes great responsibility and the growing sector needed protocols and regulations to function smoothly. This call for streamlining of Fintechs led to RBI laying out a new set of rules, and a press release for the same on 10th August 2022.
The new set of rules by the central bank introduced reforms targeting the credit system of India. The guidelines aim to bring innovation in the methods of credit delivery, ensuring optimum protection of the consumers’ interests and sustaining financing stability. The new framework applies to the entities regulated by RBI and those not regulated but permitted to practice digital lending under statutory and regulatory provisions.
The article explains the key highlights of the RBI Guidelines and their impact on Fintechs and Borrowers:
Summary of the digital lending guidelines
- All loan sanctions and repayment transactions will be carried out between the bank account of the regulated entity and the borrower without including an intermediary.
- The digital lending company must maintain complete transparency with the borrower. Details like product features along with the total cost of the loan in APR(Annual Percentage Rate) format must be disclosed by the company.
- The Fee payable to the loan service provider will be paid by the Regulated entity and not the borrower.
- The lending company should not increase the credit limit without the borrower’s consent.
- Collection of personal data by digital lending apps will only be done after the borrower’s explicit consent. Also, the collected data should be need-based and not used for marketing purposes.
- Borrowers are entitled to the cooling-off period, wherein they can exit the loans after repayment without penalty.
What happens to the fintech companies practicing digital lending
Digital lending companies have received a stipulation to put their digital lending strategies in compliance with the new guidelines by 30th November 2022. However, Banks and NBFCs that comply with the rules need not worry about running out of business. Companies like Paytm will not require much change in their business model either since their digital lending practices already align with RBI’s key highlights. The rules are imposed to streamline and standardise digital lending practices, the violation of which could lead the fintech industry to rethink its business models. This ethical pivot of the digital lending industry is expected to bring a lot of transparency to credit systems.