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Digital Lending: RBI Recommendations

On January 13, 2021, the Reserve Bank established a Working Group (“WG”) on digital lending to strengthen the extant regulatory regime governing the digital lending ecosystem in India. The WG recently submitted its report and put forth a number of recommendations. We discuss some of the key legal and regulatory recommendations put forth for digital lending applications.

Key Recommendations

1. Nodal Agency

A nodal agency to be set up to primarily verify the technological credentials of the digital lending applications. This agency would also maintain a public register of verified applications.

2. Restrictions on Balance Sheet Lending

Balance sheet lending through digital lending apps to be restricted to entities registered with or authorised by RBI or registered under any other law specifically for carrying out lending business.

3. Self-Regulating Organisation (SRO)

Setting up a Self-Regulatory Organisation (SRO) covering the participants in the digital lending ecosystem has been identified as a suitable method to regulate digital lending apps. Each digital lender is sought to provide a key fact statement in a standardized format to ensure transparency in conduct. Further, the Code of Conduct, as stipulated under the SRO would mandate governance of unsolicited commercial communications for digital loans and other purposes. In addition, a standardized code of conduct for recovery is required to be framed by the proposed SRO in consultation with RBI. Separate legislation is meant to be enforced to prevent illegal digital lending activities.

4. Direct Bank Account Transfer

To prevent creating operational grey areas in the process and to improve transparency, all loan servicing, repayment, and other activities should be performed directly in a bank account of the balance sheet lenders, without the use of a third-party pass-through account or pool account. Disbursements should always be made to the borrower’s bank account. When full interoperability among PPIs is realized, the use of pre-paid instruments (PPIs) (cards/wallets) in addition to bank accounts may be permitted. Borrowers with only a PPI account and no bank account, on the other hand can be approved for a loan if their PPI accounts are fully KYC compliant.

5. Data Privacy

The WG mentioned that customer data collection can be allowed only with the prior and explicit consent of borrowers with verifiable audit trails. All data collected, obtained, and collated is said to be stored in servers located in India and additionally, algorithmic features used in digital lending are meant to be documented to ensure necessary transparency.

The WG Report is available for comments of the stakeholders on the RBI website. Alternatively, you may download the report by clicking on the link below.

https://rbidocs.rbi.org.in/rdocs//PublicationReport/Pdfs/DIGITALLENDINGF6A90CA76A9B4B3E84AA0EBD24B307F1.PDF

There has been a burgeoning of digital lending applications in India in the recent past. This growing market is largely unregulated and hence, it is the need of the hour to have stringent regulations governing the digital lending industry. The WG Report is just the first step towards establishing a regulatory regime for digital lending applications. These are just recommendations and whether they get converted into laws is yet to be seen.


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