Unfair Method In Digital Lending And Rbi’s New Norms On It

Introduction

The Reserve Bank of India (“RBI”) has recently came up with a framework agreement to regulate digital lending in India.[i] The primary objective behind such a regulation is to deal with new and emerging challenges in digital lending landscape such as unbridled engagement of third parties, mis-selling, breach of data privacy, unfair business conduct, charging of exorbitant interest rates, and unethical recovery practices used by lending platforms.  This, in turn, dilutes the customer support and leads to unhealthy impact on other lending companies as well as on the economy. The new framework is based on recommendations of ‘working group on digital lending’ (“WGDL”) which was constituted in January 2022.[ii] The framework also regulates lending through online platform and mobile apps.

Current scenario of digital lending in India

Digital lending refers to use of automated technologies and app-based lending platforms for decision making, customer acquisition, disbursement, and recovery of loans. This system not only ensures speedy disbursal of loans to customers but also makes it easier for lending platforms to keep a check of their lending activities. Further, this process is beneficial to initiate recovery process and to structure it properly.

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Lending service providers (“LSP”) along with non-banking financial companies (“NBFCs”) lends money to the customers using digital lending apps usually owned and controlled by LSPs.[iii] In this whole process of lending, LSPs often misuse their dominant position of intermediary to cement their digital space by endowing credit beyond a borrowers’ repayment capacity. They are also known to charge higher rates of interest and to periodically increase credit limit of customers without their permission.[iv] Thus, this makes it difficult for customers to repay their loan and increases the chance of them being in a debt trap.

As per the report of WGDL,[v] the space is largely dominated by NBFCs. Additionally, most of the customers to whom loans are disbursed are small borrowers without any documented credit history and therefore, are not served by the traditional lending institutions this was also observed report of Working Group on Digital Lending as according to itShort term loans having tenure of up to 30 days, constituted about 37.5% of loans, amounting to 0.9 lakh crore compared to 0.7% for banks.[vi]

New regulation

New regulations by the RBI on digital money lending are brought with an aim to protect customers from fraudulent lending activities of LSPs and to bring transparency in the digital moneylending ecosystem.  Broad changes brought by the new framework are two-fold—for customer protection and data regulation. They are analyzed as follows:

Customer protection and conduct requirement

The RBI has now made it mandatory for all loans to be transferred directly to the borrower’s account without the need for an intermediary. Additionally, loan repayment must be made to the entity directly from the borrower’s bank account, avoiding the LSP’s nodal pass-through or pool account.  These mechanisms are frequently set up by such businesses to delay the transfer of credit to the borrower. This step will ensure that no intermediatory charge is taken by these LSPs and it also ensures prevention of customers from exorbitant interest rates charged by these intermediaries.[vii] However, this step can have a negative impact on these LSPs as most of these digital lending platforms survive on interests and service cost charged on the credit being transferred from account of NBFCs to borrowers.

Under the new regulation, before executing the contract, the lenders would have to inform the borrowers through Key Fact Statement (“KPS”).[viii]  This would include information about all the fees, charges, and annual percentage rate (“APR”) being charged by the LSP.[ix] APR includes processing fees, penalties, and all other fees related to borrowing a loan. With this rule in place, the borrowers will be better able to evaluate their options and compare them to competing lending spaces in the industry. This will also increase the LSPs’ accountability and transparency regarding their lending activities and prohibit customers from later being assessed additional fees or penalties.

Another significant change brought by new regulation is prohibition on automatic increases in credit limits. An important component of the lending process is repayment of the loan amount by the borrower to the creditor. This is so that the banks can maintain adequate financial liquidity and can reduce non-performing assets (“NPAs”).  Therefore, lenders are required to lend money to the borrowers based on their credit score which signifies the ability and track record of the borrowers to repay their loans.[x] To put it simply, the score signifies the credit worthiness of a borrower. However, it has been observed in recent times that LSPs often resort to increasing the credit limit of the customers to significantly large amounts without giving due regard to the creditworthiness of the borrower thus, non-repayment and creation of NPAs.[xi]
The new guidelines mandate that the credit limit of the customers cannot be automatically increased by LSPs without explicit consent of the customers to do so. This move is expected to put borrowers in a better position to structure their debt according to their capacity to repay.  Further, this step will keep a check on intermediaries by making them subject to supervision of RBI and allowing customers to be cognizant of their limit and to regulate it if required according to their needs thus, acting as a bulwark against exorbitant lending activities of digital lending platforms.

In addition to this, entities are now required to have a dedicated ‘grievance redressal framework’ under which they are to appoint a grievance redressal officer. They are also required to frame rules and mechanisms for a speedy disposal of grievances within 30 days of receipt of the complaint. In case of non-resolution of the grievance, it can be referred to the ombudsmen appointed by the RBI under the Reserve Bank Integrated Ombudsmen Scheme.[xii] This dedicated grievance redressal mechanism will act as bulwark for the customers against the fraudulent practices of the LSPs.

Data Regulation

Earlier, Digital lending platforms used to collect as much data of customers including mobile numbers, cards, access to contacts, massages, mails, etc. and due to data mismanagement and selling of such sensitive data to third parties by lending platforms customers were often subjected to risk of being cheated and there data becoming vulnerable to leaks.[xiii] Thus, being violative of privacy of customers. The LSPs and other online lending platforms are now required to collect only ‘need based’ data and that too with the prior explicit consent of the borrower. App based platforms are also required to give an option to the borrower to revoke the permissions which were earlier granted. Further, the privacy policy of the platform is required to be disclosed to the borrower before transaction of the loan.  Intermediaries are not allowed to share any personal data of the borrower to any third party without prior consent of the customer. The rule will also apply to Tech-Fin companies which are primarily tech-based service providers that offer financial services like e-commerce and others.

Digital lending and way forward

Digital lending market in India is amongst the fastest growing digital markets in the world and is responsible for disbursal of significant amount of loans to the different set of consumers coming from different socio-economic background.

Given the potential scalability of the market and the presence of multiple players in digital lending, regulation is required not only to promote transparency, accountability, speedy disbursal of loans, etc. but also to prevent fraudulent and mala fide acts of the intermediaries to defraud the borrows by charging them exorbitant service charges and delaying their credit. Recent regulations like these is expected to bring further scrutiny of the RBI to promote accountability of these platforms and thereby, the growth of digital lending.

Author: Harsh Namdeo is a student of Hidayatullah National law university, in case of any queries please contact/write back to us at support@ipandlegalfilings.com or   IP & Legal Filing.

REFRENCES

[i] https://rbidocs.rbi.org.in/rdocs/PressRelease/PDFs/PR689DL837E5F012B244F6DA1467A8DEB10F7AC.PDF

[ii]https://rbidocs.rbi.org.in/rdocs/PublicationReport/Pdfs/DIGITALLENDINGF6A90CA76A9B4B3E84AA0EBD24B307F1.PDF

[iii]https://www.rbi.org.in/Scripts/PublicationReportDetails.aspx?UrlPage=&ID=1189#:~:text=Lending%20Service%20Provider%3A%20Lending%20Service,loan%20portfolio%20for%20compensation%20from

[iv]https://www.business-standard.com/article/current-affairs/multi-crore-chinese-loan-app-fraud-extortion-racket-busted-8-held-ld-122040300502_1.html

[v] https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=52589

[vi] https://www.rbi.org.in/Scripts/PublicationReportDetails.aspx?UrlPage=&ID=1189

[vii]https://www.business-standard.com/article/finance/rbi-to-implement-some-recommendations-of-working-group-on-digital-lending-122081000784_1.html

[viii]https://blogs.worldbank.org/psd/key-facts-statements-simple-way-protect-consumers#:~:text=What%20is%20a%20Key%20Facts,easy%2Dto%2Dunderstand%20manner.

[ix] https://www.investopedia.com/terms/a/apr.asp

[x] https://www.consumerfinance.gov/ask-cfpb/what-is-a-credit-score-en-315/

[xi] https://timesofindia.indiatimes.com/city/hyderabad/credit-card-fraud-on-the-rise-in-hyderabad-victims-lose-rs-50000-to-rs-2-lakh/articleshow/73261738.cms

[xii]https://www.rbi.org.in/commonman/English/Scripts/PressReleases.aspx?Id=3340#:~:text=The%20Scheme%20integrates%20the%20existing,Scheme%20for%20Digital%20Transactions%2C%202019.

[xiii]https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=&cad=rja&uact=8&ved=2ahUKEwiBkIKEl4D6AhUCT2wGHfM0B5QQFnoECEAQAQ&url=https%3A%2F%2Fm.economictimes.com%2Ftech%2Finternet%2Fhow-data-brokers-are-selling-all-your-personal-info-for-less-than-a-rupee-to-whoever-wants-it%2Farticleshow%2F57382192.cms&usg=AOvVaw0F9kgKPoZrqWSWfjD2w1AZ