In today’s rapidly evolving digital landscape, digital lending has gained significant traction, providing borrowers with convenient access to financial services. To ensure customer protection, transparency, and responsible conduct, regulatory authorities have introduced comprehensive guidelines for digital lending operations. Additionally, the implementation of Default Loss Guarantee (DLG) arrangements offers an added layer of security for regulated entities engaging in digital lending. This article provides an overview of these guidelines and DLG arrangements, emphasizing their importance in fostering a trustworthy digital lending ecosystem.
Digital Lending Guidelines: Safeguarding Customer Protection and Conduct
▶ Loan Disbursal, Servicing, and Repayment:
Regulated entities (REs) must ensure that loan servicing, repayment, and related transactions occur directly between the borrower and the RE’s bank account, eliminating the involvement of third-party intermediaries. Disbursements should be made directly into the borrower’s bank account, except for specific cases.
▶ Collection of Fees and charges:
REs are responsible for ensuring that any fees or charges payable to Lending Service Providers (LSPs) are paid directly by the RE, preventing direct charges to the borrower. All applicable penal interest or charges should be clearly disclosed upfront in the Key Fact Statement (KFS).
▶ Fair Interest Rates:
It is important to decide interest rates that are fair and reasonable, considering market conditions and the risk involved. Also, it is crucial to avoid usurious interest rates that could trap borrowers in a cycle of debt.
▶ Disclosures to Borrowers:
Transparency is key in digital lending. REs should disclose the Annual Percentage Rate (APR) upfront and provide borrowers with a comprehensive Key Fact Statement (KFS) before loan execution. The KFS should include vital information such as the APR, recovery mechanism, grievance redressal officer’s details, and the cooling-off/look-up period. Any fees or charges not mentioned in the KFS cannot be levied on the borrower.
Both REs and LSPs should appoint a nodal grievance redressal officer to handle complaints related to digital lending. The contact details of these officers should be prominently displayed, and a robust complaint management system should be available for borrowers.
▶ Assessing the Borrower's Creditworthiness:
REs should capture the economic profile of borrowers before extending loans and ensure that credit limits are not automatically increased without explicit consent from the borrower.
▶ Cooling off/Look-up Period:
To provide borrowers with flexibility, a cooling-off period should be offered, allowing them to exit the digital loan within a specified timeframe without incurring penalties. The cooling-off period, determined by the RE’s board, should not be less than three days for loans with a tenor of seven days or more.
Technology and Data Requirements
▶ Data Collection, Usage, and Sharing:
REs must ensure that DLAs and LSPs collect borrower data based on explicit consent. Borrowers should have the option to provide or deny consent, restrict disclosure, revoke consent, and request data deletion or erasure.
▶ Data Storage:
LSPs should only store minimal personal information necessary for operational purposes. REs should establish clear policies on data storage, privacy, and security.
▶ Comprehensive Privacy Policy:
DLAs and LSPs should maintain a comprehensive privacy policy compliant with relevant laws and guidelines. Details regarding third parties authorized to collect personal information should be disclosed.
▶ Technology Standards:
REs and LSPs must adhere to technology standards and cybersecurity requirements specified by regulatory authorities.
▶ Financial Education:
Offer resources and information to help borrowers understand financial concepts, budgeting, and responsible borrowing. Promote financial literacy to prevent over-indebtedness.
Default Loss Guarantee (DLG) Arrangements
▶ Scope and Eligibility:
DLG arrangements apply to regulated entities engaged in digital lending, including commercial banks, cooperative banks, and non-banking financial companies. DLG providers must be incorporated companies under the Companies Act, 2013.
▶ Creditworthiness Assessment:
Data-driven methods must be employed to assess the creditworthiness of borrowers. It is vital to take into account their ability to repay loans. Experts highly suggest lending to individuals who are at high risk of default.
▶ Structure and Forms of DLG:
DLG arrangements should be supported by explicit and legally enforceable contracts between the RE and DLG provider. DLG can be accepted in the form of cash, fixed deposits with lien, or bank guarantees.
▶ Cap on DLG:
The total DLG cover on outstanding portfolios should not exceed five percent of the loan portfolio. For implicit guarantee arrangements, the DLG provider’s performance risk should not exceed five percent of the underlying loan portfolio.
▶ Recognition of NPA and Regulatory Capital Treatment:
Responsibility for recognizing individual loan assets as Non-Performing Assets (NPA) and making provisions lies with the RE, irrespective of DLG cover. Existing norms for capital computation should be followed when considering DLG for regulatory capital.
▶ Invocation, Tenor, and Disclosure:
DLG should be invoked within a specified overdue period, not exceeding 120 days. DLG agreements should remain in force for a period not less than the longest tenor of loans in the underlying portfolio. LSPs with DLG arrangements should disclose the number of portfolios and respective DLG amounts on their websites.
▶ Due Diligence and Customer Protection:
REs should have a board-approved policy for DLG arrangements, including eligibility criteria for DLG providers and robust credit underwriting standards. DLG arrangements should not replace credit appraisal requirements. Customer protection measures and grievance redressal should align with existing guidelines on digital lending.
▶ Regular Audits and Monitoring:
Adhering to regular internal and external audits to ensure compliance with regulations and ethical lending practices is really vital. Monitoring and assessment of the performance of loans and borrower behaviour must be a consistent practice.
▶ Continuous Improvement:
Be open to feedback from borrowers and regulatory authorities to improve your lending practices. Continuously innovate and adapt to changes in the lending landscape.
Conclusion:
The guidelines on digital lending and Default Loss Guarantee arrangements play a crucial role in promoting responsible digital lending practices and protecting borrowers’ interests. Regulated entities must adhere to these guidelines to ensure transparency, customer protection, and the overall growth of the digital lending ecosystem. By establishing robust systems, leveraging technology securely, and fostering responsible conduct, the industry can drive financial inclusion and empower individuals with accessible and trustworthy digital lending solutions.
Introduction to RBI’s Draft Guidelines for Transparent Digital Loans
The RBI has issued guidelines to regulate digital loan aggregators, now termed Lending Service Providers (LSPs). These rules aim to organize and oversee the digital lending sector, ensuring transparency and protecting borrowers from malpractices.
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