The Reserve Bank of India (RBI) on Wednesday released the first set of standards to regulate digital lending to tackle the growing number of online frauds and illegal activities.
In accordance with the new standards, all loan disbursements and repayments must be executed only between the bank accounts of the borrower and the regulated entity without any transfer or pool account of the Loan Service Provider (LSP) or any third.
RBI’s regulatory framework is focused on the digital lending ecosystem of RBI’s Regulated Entities (REs) and Lending Service Providers (LSPs) they have engaged to extend various authorized credit facilitation services.
With respect to entities authorized to make a loan under other legal/regulatory provisions but not regulated by the RBI, the respective regulatory/supervisory authority may consider formulating or promulgating appropriate rules/regulations on the digital loan based on WGDL recommendations.
For entities that lend outside the scope of any legislative/regulatory provision, the WGDL has suggested specific legislative and institutional interventions for consideration by central government to curb illegitimate lending activity carried out by these entities.
The RBI is legally mandated to exploit the country’s credit system to its advantage. In this endeavor, RBI has encouraged innovation in the financial system, products and methods of extending credit while ensuring their orderly growth, preserving the stability of funding and ensuring the protection of the interests of depositors and customers. .
Recently, innovative methods of designing and delivering credit products and their service through the digital lending channel have gained prominence. However, some concerns have also emerged which, if not mitigated, could erode members of the public’s trust in the digital lending ecosystem.
The concerns primarily relate to unbridled third-party engagement, selling, breach of data privacy, unfair business conduct, charging exorbitant interest rates, and unethical recovery practices. In this context, RBI constituted a working group on “digital lending, including lending through online platforms and mobile applications” (WGDL) on January 13, 2021.
The report submitted by the WGDL was placed on the RBI website, inviting comments from stakeholders and members of the public. Considering the inputs received from a diverse set of stakeholders, a regulatory framework to support orderly growth in the provision of credit through digital lending methods while mitigating regulatory concerns has been strengthened.
Reacting to the release of new guidelines, Madhusudan Ekambaram, Co-Founder and CEO of KreditBee, said, “Legitimate players, like us, have already adhered to these guidelines and would continue to further refine operations to enhance our transparency and fairness. existing. practices and customer confidence in the digital lending ecosystem to ensure healthy and sustained industry growth.
This regulatory framework is based on the principle that lending activities can only be carried out by entities that are either regulated by the Reserve Bank or entities authorized to do so under any other law.