Know the RBI guidelines that are in place to safeguard the borrowers.
Sajjad Bazaz
The deadly impact of the Covid-19 pandemic taught us some important lessons of the century by triggering radical changes not only in the way of our living, but also reshaping the economic processes on the whole. In the context of changing lives, it’s the economics of living where a series of radical transformation has been set in motion. The systems and procedures driving our economic processes have been highly impacted and most of these pre-Covid processes are fast becoming redundant. In other words, the virus has made technology viral. Precisely, the biggest contribution of the pandemic on the developmental side is the huge push it gave to the digitization of the systems and procedures, particularly in the financial system. Today, digitization is driving inclusion across the financial services’ landscape, education platforms and healthcare ecosystem for all the citizens of the country.
Let’s focus on the radical changes it brought in the financial system. When we talk of the financial system, it’s our banking system which is in focus for the kind of massive technology-driven changes witnessed in its day-to-day operations. Today, payments are made through a mobile phone not just at retail outlets but also peer to peer, completely redefining the way in which money is transferred between individuals. Besides, we have seen innumerable payment apps which facilitate transfer of funds at lightning speed. Besides, we are witnessing a mushroom growth of digital lending apps.
Basically, in the past couple of years, we have been observing a dramatic shift in customers’ choices and preferences. Their expectations have gone up to newer levels. This changing dynamic of the customers’ expectations threw a big challenge to the banks and they had no other choice but to fall in line with the changing mood of the customers. To be precise, the changing landscape of banking revolves around the adoption of emerging technologies, meeting the customers’ demands through customisation of products and services and automation of systems and procedures.
The banks are fine-tuning their operations on continuous basis by proactively adopting newer technologies and entering into collaboration with fintechs. This way they are scripting new-age banking in the country.
However, the changing scenario in the banking system also threw serious challenges to the RBI. There are regulations which don’t cover some of the emerging new-age banking practices. For instance, among significant changes observed in the banking industry is the digital lending system which has emerged as one of the most preferred means of getting access to credit by customers. In fact, the digital lending platforms are all set to transform the traditional lending practices, especially in the retail sector. Today, we come across digital lending apps making it to almost everybody’s smartphone. Most of the apps are unregulated and operating illegally. Reports indicate that millions of Indians rely on lending apps and there are no guiding sources for the borrowers to pick a legal lending app.
They have been lending money outside the formal financial system. Even as their loan appraisal and disbursal is quick, almost real-time, they lose no time to invoke their aggressive recovery tactics on a small miss in repayment. Notably, these lending apps download contact lists, photos and other data from borrowers’ phones and the same is used against the borrower in case they default. Here chances of misusing the data are not ruled out.
It’s worth mentioning that the RBI guidelines in some areas of digital lending were missing. In this uncontrolled environment, the digital lending ecosystem became the fastest mode of getting a loan sanctioned and disbursed. But, at the same time, reports of rising malpractices such as uncontrolled engagement of third parties, mis-selling, breach of data privacy, unfair business conduct, charging of exorbitant interest rates, and unethical recovery practices started hitting media headlines.
Over a period of time, customer complaints of malpractices against digital lending platforms were rising and the RBI framed a committee in January 2021 to enhance customer protection and make the fast growing digital lending ecosystem safe. The committee came out with its report in November 2021 and suggested to restrain digital loan platforms through a mix of regulations, including setting up of a nodal agency to verify their credentials and legislative measures to prevent “illegal lending”. The committee also found that more than half of about 1,100 digital moneylenders were operating illegally.
A snippet of the committee report highlights the country’s lending space witnessing a tectonic shift with loans increasingly being disbursed through digital means in recent years. It says that over 6% of all the loans given by commercial banks in April-December 2020 were digital, a marked jump from less than 1.5% in 2016-17.
Now, in response to the committee report, a few months back, the RBI issued strict digital lending guidelines to regulate the digital lending platforms in the country.
Intent behind RBI Guidelines
These guidelines have been issued to curb the menace of fake digital lending platforms where the end user incurs the loss. The guidelines have been designed to protect the interest of the borrowers and to ensure that the money cycle is taking place through legitimate apps with proper KYC structure and audit mechanism. This will not only ensure that the digital lending platform is functioning in compliance with applicable laws and is not indulging in malpractices but will also help the borrowers make informed choices regarding borrowings.
In other words, the safeguards provided under this framework will ensure that the interests of borrowers are protected and will, at the same time, enhance consumer confidence in the regulated digital lending ecosystem.
What are the guidelines that the borrowers need to know before approaching a digital lending platform for a loan?
The RBI guidelines envisage that all loan disbursals and repayments through the digital lending apps should be executed only between the bank accounts of borrower and the regulated entity without any pass-through or pool account of the lending service provider (LSP) or any third party. Besides, all fees or costs to LSP to be paid by a regulated entity and not borrower.
The RBI, through these guidelines, has mandated an upfront disclosure of all-inclusive cost via annual percentage rate to the borrower. This is to make the borrower aware of the kind of interest they will pay on digital lending platforms. There is also a cooling-off period when a loan can be paid off to be part of a loan contract. Additionally, to protect data privacy, the RBI has stated that the data collected by the digital lenders should be need based, should have clear audit trails and should be only done with prior explicit consent of the borrower.
The guidelines also empower borrowers with the option to accept or deny consent for use of specific data, including the option to revoke previously granted consent as well, besides the option to delete the data collected from them by the digital lending platforms in the past.
Is there any scope for the borrower to file a complaint against the digital lender, if any? Regulatory Entities (REs) will have to ensure that they and their loan service providers or third parties engaged by them shall have a suitable nodal grievance redressal officer to deal with complaints related to fintech and digital lending. The grievance redressal officer shall also deal with complaints against their respective digital lending apps (DLAs). Details of the grievance redressal officer must be prominently displayed on the website of the RE, its LSPs and on DLAs.
Borrowers can raise their grievance and complaint by reaching out to the nodal grievance redressal officers engaged by the Regulated Entities and the loan service providers or third parties. A borrower can also complain against their digital lending mobile app. The details of the officers will be there on the websites of Regulated Entity, LSPs and the app.
As per the guidelines, the complaint should be resolved within 30 days. In case the complaint isn’t resolved within 30 days, the borrower can directly reach out to RBI through integrated ombudsman scheme.
Sajjad Bazaz heads Internal Communication Department of Jammu & Kashmir Bank Ltd. The views expressed are his own and not of the institution he works for.
