<img src="https://m2p-website-file.s3.ap-south-1.amazonaws.com/m2p-website-file/marketing-cms/m2p-blog/2022/09/banner_1_1.webp" alt="M2P Fintech" title="" width="100%" height="253">Reserve Bank of India (RBI) released the latest Digital Lending (DL) guidelines on September 2nd, 2022. This notification confirmed the implementation of the recommendations specified in Annex-1 of the RBI press release**, published a few weeks ago.&nbsp;Before deep diving into these guidelines, let us understand the RBI’s role as a regulator in the Indian economy. &nbsp;<h2 class="heading-node" id="xttnnf4sw">Brief history of RBI</h2>A book by Dr. B. R. Ambedkar sparked the idea of setting up a central banking institution for India. Subsequently, on April 1, 1935, RBI started its operations based on the RBI act of 1934. The act provides the statutory basis for the functioning of the bank. Yet, RBI remained a private institution till it was nationalized in 1949. Since then, RBI has been regulating, moderating, and monitoring the financial aspects of the country’s fiscal and economic position.The primary functions of RBI include the following.<ul class="list-node" id="z3s3llbmp"><li>Monetary Authority – Implementing and monitoring monetary policies</li><li>Currency issuance – Producing, managing, issuing, and exchanging quality currency notes and coins</li><li>Regulator &amp; Financial administrator – License issuance, bank mergers, branch expansion, and liquidity of assets</li><li>Managing foreign exchange – Maintaining Rupee value outside India, managing Indian FOREX reserves, and helping foreign trade payments</li></ul>Other than these, RBI’s role also includes stabilizing India’s financial reserves. They work with players such as financial institutions, regulatory bodies, fintechs, and government agencies to ensure the smooth flow of financial services.&nbsp;To summarize, all private and public banks are monitored by RBI to build trust and safety among their users.&nbsp;In the last eight years, fintechs, online/mobile banking, and other technological advancements have modernized the financial ecosystem worldwide. Digital transformation in financial services is on a rapid growth spurt. And in recent years, digital lending has been a prominent topic in the industry with its share of pros and cons. &nbsp;<h2 class="heading-node" id="ti82051sp">So, what is digital lending?&nbsp;</h2><blockquote class="block-node" id="p26pelwhr">According to RBI reports, Digital Lending (DL) is “A remote and automated lending process, majorly using seamless digital technologies in customer acquisition, credit assessment, loan approval, disbursement, recovery, and associated customer service.”&nbsp;</blockquote>Now that the definition clearly states what constitutes digital lending, let's see who the players are and their roles in the DL realm.&nbsp;<h2 class="heading-node" id="dklhgur4h">Key players in the DL arena</h2><ul class="list-node" id="ibj6ivuxn"><li>Borrower- End customer who is the recipient of the loan amount.</li><li>Lenders- Traditional players include Non-Banking Financial Companies (NBFCs) and Banks. They can be further divided into:<ul class="list-node" id="vt0pd5crw"><li>Balance sheet lenders- Those who have a record of the loan in their books</li><li>Marketplace lenders- Those who connect borrowers and balance sheet lenders</li></ul></li><li>Lending Service Providers (LSPs)- They are the fintechs that carry out one or more of the lender’s activities like acquiring potential borrowers, disbursement, and collection among several others. LSPs could either be in or out of the regulatory purview of the financial regulator.&nbsp;</li><li>Fringe lenders: They are shadow and unlicensed lenders who do not come under the purview of any registered entity. Monitoring these lenders is difficult as they do not have a proper identity trail.&nbsp;</li></ul>The key players listed above contribute to the remarkable growth of the industry.&nbsp;<h2 class="heading-node" id="ir07p6kz3">Steady growth prospects</h2>The pandemic era witnessed phenomenal growth in online transactions. There was a significant rise in digital lending platforms and applications. As a result, applying for and borrowing money from a digital lender got simplified, thus giving rise to thousands of Digital Lending Applications (DLAs).&nbsp;Digital Lending (DL) recorded one of the highest growth in India, from $9bn in 2012 to around $110 bn in 2019. &nbsp;By 2023, the value of the digital lending industry is expected to reach $350 Bn dollars.&nbsp;<img src="https://m2p-website-file.s3.ap-south-1.amazonaws.com/m2p-website-file/marketing-cms/m2p-blog/2022/09/inner-image_1-copy-2.webp" alt="M2P Fintech" title="" width="100%" height="253">When we talk about DL, First Loss Default Guarantee (FLDG) is the term we hear quite often. It is one of the many triggers of RBI's DL regulation.Let's get a quick glimpse into what FLDG is.<h2 class="heading-node" id="e7ha4q7hp">What is FLDG?</h2>We'll start with a simple example. In trading communities, family businesses are carried on from one generation to the next. When entrepreneurs emerge in these situations, loans are given to them based on the family's credibility. The reason is that if they do not make a payment, the lender can recover it from the borrower’s family.Likewise, in the case of First Loss Default Guarantee (FLDG), whenever a borrower defaults, a third party (fintech, in this case) comes in to compensate the lender. This mechanism is FLDG.&nbsp;Here's how FLDG works.<ul class="list-node" id="9gs2tjgn2"><li>Typically, fintechs partner with financial institutions by proposing to widen their customer base by targeting a particular customer segment</li><li>They zero in on that niche and turn them into leads using different marketing strategies</li><li>NBFCs agree to take on these loans on their books with a threshold of guaranteed interest</li><li>This guaranteed interest will be backed by the FLDG arrangement between the lender (NBFC) and LSP (fintech)</li></ul>Few NBFCs were renting out their licenses through FLDG. This enabled LSPs to build a proxy portfolio which some industry experts claim to be a risk to the lending system.&nbsp;<h2 class="heading-node" id="111xwkfi9">Need for RBI Working Group</h2>While FLDG contributed to the industry's increasing volume, several unregulated entities came into the picture. They exploited customer data and resorted to illicit collection activities. Many borrowers faced serious trouble as they were unaware of the real nature of these entities. An alarming rise in customer complaints resulting from the actions of the unregulated entities placed digital lending on RBI’s radar.&nbsp;To address and streamline the same, RBI set up a Working Group (WG) to understand the risks and set up necessary controls in the DL industry.&nbsp;<h2 class="heading-node" id="fcp9tkbk8">What did the Working Group find out?</h2>On January 13, 2021, RBI set up a WG consisting of thirty-six stakeholders. The purpose was to study the DL industry and its activities in detail and to implement the right regulatory approach.The WG surveyed and studied the industry and presented a report (containing two annexures) to RBI on November 18, 2021.&nbsp;The report’s findings were based on the following pillars.<ul class="list-node" id="motjl864k"><li>Discussions with the stakeholders</li><li>Survey and data analysis</li><li>Review of extant regulatory / Supervisory framework and industry practices</li><li>Review of global practices and literature</li></ul>After considering the recommendations, RBI officially announced the implementation of the DL guidelines on September 2, 2022.<img src="https://m2p-website-file.s3.ap-south-1.amazonaws.com/m2p-website-file/marketing-cms/m2p-blog/2022/09/inner-image_1-copy.webp" alt="M2P Fintech" title="" id="f425sz7ha" width="100%" height="253"><h2 class="heading-node" id="6avlwzuzi">&nbsp;DL guidelines implemented</h2><h3 class="heading-node" id="9x0k6ukoy">Annexure – I</h3>The following recommendations were accepted by RBI for immediate implementation.<h3 class="heading-node" id="xwx0cvy12">Customer Protection</h3><ul class="list-node" id="tsdlck58x"><li>Loan disbursals and payments should be between the borrower’s bank account and the lenders without any third-party pool account involved</li></ul><ul class="list-node" id="r68myhycc"><li>Regulated Entities (REs) should directly pay the fees and charges to the Lending Service Providers (LSPs) instead of charging the borrower directly</li></ul><ul class="list-node" id="29mxi1vhz"><li>Before the execution of the loan contract, the borrower must be given a standard Key Fact Statement (KFS)</li></ul><ul class="list-node" id="23dbqwzho"><li>Contents of KFS – Annual Percentage Rate (APR), Recovery method, Grievance addressal, cooling-off/ look-up period&nbsp;</li></ul><ul class="list-node" id="avc3zqm4a"><li>Any change in credit limit must require the borrower’s explicit consent</li></ul><ul class="list-node" id="ty03qxa1h"><li>Borrowers must be given the option of exiting digital loans during the cooling-off period by paying the principal and the applicable APR without any penalty</li></ul><ul class="list-node" id="mciab4cid"><li>All borrower’s complaints should be resolved by a RE and LSPs engaged nodal grievance redressal officer</li></ul><ul class="list-node" id="hve36i3x7"><li>The borrower can escalate it to the RBI if the complaint is not resolved within 30 days</li></ul><h3 class="heading-node" id="dd7ts6i9g">Technology and Data</h3><ul class="list-node" id="h4tyt70ye"><li>Data collection should be done with the borrowers' explicit consent with audit trails &nbsp;</li><li>DLAs should collect only specific data of the borrowers pertaining to <a class="link" href="https://m2pfintech.com/blog/crack-the-kyc-jigsaw-ease-onboarding-compliance/">Know your Customer (KYC)</a> and onboarding</li><li>Borrowers must be provided with consent to accept, deny, or delete the data collected by the DLAs/LSPs</li></ul><h3 class="heading-node" id="6kpyid9pl">Legal and Regulatory</h3><ul class="list-node" id="27yjfnlrz"><li>Any lending sourced through DLAs (of the RE or the LSP employed by RE) must be disclosed to Credit Information Companies (CICs) by REs</li><li>If REs are using the FLDG model, they shall adhere to the provisions of the <a class="link" href="https://www.rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=12165">Master Direction – Reserve Bank of India (Securitisation of Standard Assets) Directions, 2021, dated September 24, 2021</a></li></ul><h2 class="heading-node" id="t9hkboftc">WG recommendations accepted in principle</h2><h3 class="heading-node" id="3r58jerkf">Annexure – II</h3>The following recommendations were accepted in principle but require further examination.&nbsp;<h3 class="heading-node" id="tga9u9bap">Customer Protection</h3><ul class="list-node" id="bwn63txc9"><li>Any time a RE or LSP looks at or asks for credit information from a CIC, the borrower will be notified by email or text message&nbsp;</li></ul><h3 class="heading-node" id="nn4390fg9">Technology and Data</h3><ul class="list-node" id="3xoi0979d"><li>Banks will keep an eye on accounts often used from a different or overseas IP address that doesn't match the account holder's KYC profile&nbsp;</li></ul><ul class="list-node" id="nd7vb0o1c"><li>Baseline technology standards to be laid down by RBI primarily include secure application logic and an auditable log for every user action</li><li>REs should ensure that the underwriting algorithms are well-researched and auditable enough to point out discrimination factors&nbsp;</li><li>Artificial Intelligence (AI) used by digital lenders should be ethical and focus on protecting customer interests, security, and privacy</li></ul><h3 class="heading-node" id="28bmw3gy5">Legal and Regulatory Framework</h3><ul class="list-node" id="oktvcvrxo"><li>A Self-Regulatory Organization (SRO) to be set up which will focus on framing a code of conduct for recovery and a model standardized LSP agreement for Balance Sheet Lenders</li></ul><ul class="list-node" id="age2sbmui"><li>While the recommendation concerning FLDG is still under examination, REs must ensure financial products involving third-party compensation for defaulters should comply with the Master Direction – Reserve Bank of India (Securitization of Standard Assets) Directions</li></ul><h2 class="heading-node" id="qu1um5gxv">Conclusion</h2>The latest guidelines emphasize the importance of protecting borrowers by curbing the misuse of digital lending apps. The REs are given time until November 30, 2022, to develop systems and processes that are compliant with the ruling.Undoubtedly, fintech-led digital lending will certainly undergo changes. The larger perspective is to protect the customers and the economy from unscrupulous practices and uphold the trust of the banking system.&nbsp;Reference**: <a class="link" href="https://rbidocs.rbi.org.in/rdocs/PublicationReport/Pdfs/DIGITALLENDINGF6A90CA76A9B4B3E84AA0EBD24B307F1.PDF">Annexure 1 of RBI press release</a>Want to know more about digital lending? Write to us at&nbsp;<a class="link au lg" href="mailto:business@m2pfintech.com" target="_blank" rel="noopener ugc nofollow">business@m2pfintech.com</a>.<a class="link" href="https://m2pfintech.com/newsletter/">Subscribe</a>&nbsp;to our newsletter and get the latest fintech news, views, and insights, directly to your inbox.Follow us on&nbsp;<a class="link" href="https://www.linkedin.com/company/m2pfintech/mycompany/">LinkedIn</a>&nbsp;and&nbsp;<a class="link" href="https://twitter.com/m2pfintech">Twitter</a>&nbsp;for insightful fintech tales curated for curious minds like you.

RBI’s New Digital Lending Guidelines – Will it be a Game Changer?

<img src="https://m2p-website-file.s3.ap-south-1.amazonaws.com/m2p-website-file/marketing-cms/m2p-blog/2022/05/Artboard-1-copy-8-7.webp" alt="M2P Fintech" title="" width="100%" height="253">The Reserve Bank of India (RBI) has promulgated new directives for credit and debit card issuance and conduct for 2022. The new guidelines are intended to protect the interests of retail customers. These norms are effective from July 1st, 2022.The directions on credit cards apply to all Scheduled Banks and all Non-Banking Financial Companies (NBFCs) operating in India. Yes, RBI has now opened a window for NBFCs to issue credit cards with prior approval from the regulator. Let us be clear here that the new regulations on credit cards do not apply to Payments Banks and State/District Central Cooperative Banks. On the other hand, the rules concerning debit cards apply to every bank operating in India.According to the new guidelines, commercial banks with a net worth of over Rs 100 crore can issue credit cards, either independently or by integrating with other card-issuing banks/NBFCs. Regional rural banks (RRBs) are now authorized to issue credit cards by partnering with their sponsor bank or other banks. Non-banking financial companies (NBFCs) can issue debit cards, credit cards, charge cards, or other similar products virtually or physically only after obtaining approval from the RBI.<h2 class="heading-node" id="0d03" style="text-align: justify">Key directives on credit cards</h2><ol class="list-node" id="3lsobeyqe"><li>RBI strictly prohibits banks from issuing unsolicited loans and cards or upgrading an existing loan/card without explicit consent from the customer/cardholder. Furthermore, upon nonadherence, banks or the card-issuers shall not only reverse charges but also pay a penalty of twice the value of the charges.</li><li>If the unsolicited cards are misused before reaching the customer, the card issuers shall be solely responsible for the losses incurred due to the misuse.</li><li>Written consent from the customer is required to issue or upgrade a credit card. Banks can accept digital consent if the customer cannot provide written consent; however, RBI must be notified.</li><li>When a cardholder raises a dispute on a transaction as ‘fraud,’ the card issuers must not charge on the transaction until the issue is settled.</li><li>Card issuers shall quote different Annualized Percentage Rates (APR) on credit cards for retail purchases, cash advances, balance transfers, and late payments or non-payment of the minimum amount due.</li><li>The card issuers should not impose any hidden charges while issuing credit cards. For example, EMI conversion with interest shall not be disguised as no-cost or zero-interest EMI.</li><li>For the closure of existing credit cards, the card issuers must honor the request within seven working days, subject to payment of all dues by the cardholder. If the issuer fails to complete the process within the given time frame, Rs.500/day penalty shall be imposed.</li><li>With respect to recovering debts, card issuers and their agents must not resort to intimidation or harassment. The lenders shall adhere to the fair practices code and avoid any verbal or physical harassment against any person, publicly humiliating and/or intruding upon the privacy of the customer’s family members and friends.</li><li>The card issuers shall limit the disclosure of customer information to the DSAs/DMAs/recovery agents. Card issuers must release only information that the agents require to discharge their duties and abstain from disclosing additional personal information. Also, the card issuers should ensure that customer information is not misused during credit card marketing.</li><li>Card issuers can report a credit card account as “past due” to CIBIL, CRIF, or others only if the amount remains unpaid for more than three days.</li></ol><h2 class="heading-node" id="e739" style="text-align: justify">Key directives on debit cards</h2><ol class="list-node" id="70pzbghi7"><li>Banks shall only issue debit cards to customers holding savings/current accounts. Issuance of debit cards to cash credit/loan account holders is prohibited.</li><li>Banks shall not force customers to avail the debit card. If a customer does not want a debit card, he/she cannot be denied other services from the bank. The debit card issuance should not be linked to the availment of other benefits from the bank.</li><li>Banks should develop a comprehensive debit card issuance policy and get approval from their boards and RBI. Subsequently, banks must roll out the debit cards per this policy.</li><li>Banks must provide options for disabling/blocking the form factor via internet/mobile banking, IVR, SMS, and/or other modes.</li><li>In place of plastic debit cards, Scheduled Commercial Banks can issue other form factors after obtaining explicit consent from the customer.</li></ol>In addition to the above regulations, RBI states, “It will not preclude the banks from linking the overdraft facility provided along with Pradhan Mantri Jan Dhan Yojana accounts with a debit card.”<h2 class="heading-node" id="b31d" style="text-align: justify">Directives for Co-branded cards</h2><ol class="list-node" id="9heafrx6i"><li>Co-branded debit/credit cards should indicate that they have been issued according to the co-branding arrangement.</li><li>A co-branding partner shall not market the card as its product. In addition, the card issuer’s name must be explicit on the cards.</li><li>The co-branding arrangement should be in accord with the card issuer’s board-approved policy.</li><li>Card issuers are accountable for the acts of the co-branding partner.</li></ol>For co-branding agreement between banks and NBFCs for credit cards, RBI states, “NBFCs, which desire to enter into a co-branding arrangement for issue of credit cards with a card-issuer, shall also be guided by the Guidelines on the issue of Co-Branded Credit Cards contained in the respective Master Directions applicable to NBFCs, as amended from time to time.”For more clarity on credit card and debit card issuance, write to us at&nbsp;<a class="link au mr" href="mailto:business@m2pfintech.com" target="_blank" rel="noopener ugc nofollow">business@m2pfintech.com</a>.<a class="link" href="https://m2pfintech.com/newsletter/">Subscribe</a>&nbsp;to our newsletter and get the latest fintech news, views, and insights, directly to your inbox.Follow us on&nbsp;<a class="link" href="https://www.linkedin.com/company/m2pfintech/mycompany/">LinkedIn</a>&nbsp;and&nbsp;<a class="link" href="https://twitter.com/m2pfintech">Twitter</a>&nbsp;for insightful fintech tales curated for curious minds like you.

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