1. The Reserve Bank is statutorily mandated to operate the credit system of the country to its advantage¹. In this endeavour, the Reserve Bank has encouraged innovation in the financial system, products and credit delivery methods while ensuring their orderly growth, preserving financing stability and ensuring protection of depositors’ and customers’ interest. Recently, innovative methods of designing and delivery of credit products and their servicing through Digital Lending² route have acquired prominence. However, certain concerns have also emerged which, if not mitigated, may erode the confidence of members of public in the digital lending ecosystem. The concerns primarily relate to unbridled engagement of third parties, mis-selling, breach of data privacy, unfair business conduct, charging of exorbitant interest rates, and unethical recovery practices.

2. Against this background, the Reserve Bank had constituted a Working Group on ‘digital lending including lending through online platforms and mobile apps’ (WGDL) on January 13, 2021. The report submitted by the WGDL was placed on the RBI website, inviting comments of stakeholders and members of the public. Taking into account the inputs received from diverse set of stakeholders, a regulatory framework to support orderly growth of credit delivery through digital lending methods while mitigating the regulatory concerns, has been firmed up. This regulatory framework is based on the principle that lending business can be carried out only by entities that are either regulated by the Reserve Bank or entities permitted to do so under any other law.

3. The universe of digital lenders is classified into three groups –

1. Entities regulated by the RBI and permitted to carry out lending business;

2. Entities authorized to carry out lending as per other statutory/regulatory provisions but not regulated by RBI;

3. Entities lending outside the purview of any statutory/ regulatory provisions.

The Reserve Bank’s regulatory framework is focused on the digital lending ecosystem of RBI’s Regulated Entities (REs) and the Lending Service Providers (LSPs)³ engaged by them to extend various permissible credit facilitation services. As regards entities falling in the second category [3(b) above], the respective regulator/ controlling authority may consider formulating or enacting appropriate rules/regulations on digital lending based on the recommendations of WGDL. For the entities in the third category [3(c) above], the WGDL has suggested specific legislative and institutional interventions for consideration by the Central Government to curb the illegitimate lending activity being carried out by such entities.

4. In the above backdrop, RBI has examined the recommendations⁴ made by the WGDL. Recommendations accepted for immediate implementation and the consequent regulatory stance are enclosed as Annex-I. Certain highlights of the requirements being mandated to be followed by REs, their LSPs, Digital Lending Apps (DLAs)⁵ of REs, DLAs of LSPs engaged by REs, are as follows:

a. Customer Protection and Conduct Issues –

1. All loan disbursals and repayments are required to be executed only between the bank accounts of borrower and the RE without any pass-through/ pool account of the LSP or any third party.

2. Any fees, charges, etc., payable to LSPs in the credit intermediation process shall be paid directly by RE and not by the borrower.

3. A standardized Key Fact Statement (KFS) must be provided to the borrower before executing the loan contract.

4. All-inclusive cost of digital loans in the form of Annual Percentage Rate (APR)⁶ is required to be disclosed to the borrowers. APR shall also form part of KFS.

5. Automatic increase in credit limit without explicit consent of borrower is prohibited.

6. A cooling-off/ look-up period during which the borrowers can exit digital loans by paying the principal and the proportionate APR without any penalty shall be provided as part of the loan contract.

7. REs shall ensure that they and the LSPs engaged by them shall have a suitable nodal grievance redressal officer to deal with FinTech/ digital lending related complaints. Such grievance redressal officer shall also deal with complaints against their respective DLAs. The details of the Grievance redressal officer shall be prominently indicated on the website of the RE, its LSPs and on DLAs, as applicable.

8. As per extant RBI guidelines, if any complaint lodged by the borrower is not resolved by the RE within the stipulated period (currently 30 days), he/she can lodge a complaint under the Reserve Bank – Integrated Ombudsman Scheme (RB-IOS)⁷.

b. Technology and Data Requirements

1. Data collected by DLAs should be need based, should have clear audit trails and should be only done with prior explicit consent of the borrower.

2. Option may 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 DLAs/ LSPs.

c. Regulatory Framework

1. Any lending sourced through DLAs (either of the RE or of the LSP engaged by RE) is required to be reported to Credit Information Companies (CICs) by REs irrespective of its nature or tenor.

2. All new digital lending products extended by REs over merchant platforms involving short term credit or deferred payments are required to be reported to CICs by the REs.

5. Recommendations, though accepted in-principle, which require further examination are listed as Annex-II.

6. Recommendations which require wider engagement with the Government of India and other stakeholders in view of the technical complexities, setting up of institutional mechanism and legislative interventions are listed in Annex-III.

7. All the regulated entities of RBI are advised to be guided by the regulatory stance conveyed in this press release. It shall be noted that any kind of outsourcing arrangement involving a RE and LSPs/DLAs shall be subject to the extant guidelines on outsourcing⁸. The REs are advised to ensure that the LSPs/DLAs also implement the requirements set out in Annex-I, as applicable and the onus of ensuring implementation of the requirements will rest with the REs. Detailed instructions will be issued separately.

(Yogesh Dayal)     
Chief General Manager

Press Release: 2022-2023/689

¹ Reserve Bank of India Act, 1934, Preamble.

² A remote and automated lending process, majorly by use of seamless digital technologies in customer acquisition, credit assessment, loan approval, disbursement, recovery, and associated customer service.

³ An agent of a Regulated Entity who carries out for a fee from the RE, one or more of lender’s functions in customer acquisition, underwriting support, pricing support, disbursement, servicing, monitoring, collection, recovery of specific loan or loan portfolio.

⁴ The word ‘recommendations’ refers to both recommendations and suggestions of WGDL.

⁵ Mobile and web-based applications with user interface that facilitate borrowing by a borrower from a digital lender. DLAs will include apps of the REs as well as operated by LSPs which are engaged by REs for extension of any credit facilitation services.

⁶ APR shall be based on an all-inclusive cost and margin including cost of funds, credit cost and operating cost, processing fee, verification charges, maintenance charges, etc., except contingent charges like penal charges, late payment charges, etc. APR must be disclosed to the borrower upfront as part of the Key Fact Statement (KFS).

⁷ https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=52549

⁸ Para 2.6 of the Master Circular on “Loans and Advances – Statutory and Other restrictions” dated July 01, 2015, Guidelines on Managing Risks and Code of Conduct in Outsourcing of Financial Services by Banks issued vide Circular dated November 03, 2006 as amended from time to time, Para 120 and 120 A of “Master Direction - Non-Banking Financial Company - Systemically Important Non-Deposit taking Company and Deposit taking Company (Reserve Bank) Directions, 2016” dated September 01, 2016, Para 106 and 106A of the ‘Master Direction - Non-Banking Financial Company – Non-Systemically Important Non-Deposit taking Company (Reserve Bank) Directions, 2016’ both dated September 01, 2016, ‘Guidelines for Managing Risk in Outsourcing of Financial Services by Co-operative Banks’, dated June 28, 2021 and other related instructions issued by the Reserve Bank from time to time.