Knowing RBI Digital Lending Norms Closely

The Reserve Bank of India (RBI) had issued detailed guidelines that will increase scrutiny and supervision over digital lending apps and lenders who engage with them, after several complaints of malpractice against such apps. Now let's get into some details that what actually are some norms?

Aditya Kumar, Co- Founder & CEO, Niro said, "The recently issued RBI guidelines on digital lending have turned out to be quite forward-looking & customer-centric. Through these guidelines, the RBI is looking to promote digital lending whilst ensuring customers remain protected from usurious lending practices and solve other data & privacy-related issues. From the Digital Lending App’s (DLA’s) perspective, implementation of the guidelines recommended will create challenges on various fronts such as gaining customer consent and disclosures, fund flows, data collection and storage and a cooling-off period. Yet the future of digital lending looks highly promising for DLAs and customers alike."

Standardised Key Fact Statement

RBI in a circular said that a standardised Key Fact Statement (KFS) must be provided to the borrower before executing the loan contract. All-inclusive cost of digital loans in the form of Annual Percentage Rate (APR) is required to be disclosed to the borrowers.

"KFS simply put, is a document which will contain all information pertaining to the loan amount (being disbursed to the borrower), total interest being charged (through the tenure of the loan), upfront charges such as processing fees, insurance and other charges( if any), the net disburses amount, loan term, number of instalments etc. This standardisation of the Key Fact Statement will empower customers by ensuring complete transparency on all the costs associated with a loan – something which some digital (and non-digital) lenders have attempted to conceal in the past. This will also enable users to compare loan offers across various platforms using this apple-to-apple Key Fact Statement format. One of the most notable callouts in this KFS is the Annual Percentage Rate (APR)", Kumar said.

Annual Percentage Rate

All-inclusive cost of digital loans in the form of Annual Percentage Rate (APR) is required to be disclosed to the borrowers. APR shall also form part of KFS, said the RBI circular.

Kumar said, "Expressing lending rates in the form of APR is extremely important from the perspective of providing complete transparency to loan borrowers. Some lenders and a few banks have previously expressed interest in “flat” terms, instead of a reducing balance – which led to the borrowers continuing to pay interest on the full principal amount instead of the residual balance. Customers usually end up getting swayed by optically cheaper rates of interest which in actuality turn out to be double of what was originally stated (a 10 per cent flat rate is equal to nearly 20 per cent on a reducing balance basis). Other lenders, charge very high processing fees relative to the size of the loan, especially on high-cost, short-term loans (e.g. Rs 500 processing fees on a Rs 6,000 loan for 60 days), in addition to the already high-interest rates (say 36 per cent)."

"While earlier platforms would have been able to disguise the interest rate as “3 per cent per month” which may seem palatable to borrowers, Digital lenders will now need to disclose this as 88 per cent Annual Percentage Rate, or APR i.e. fees in addition to total annualised interest. For some lenders, this will naturally lead to a negative impact in terms of borrower resistance, as customers will be weary to take loans at such usurious interest rates. We will have to wait in order to truly understand the extent to which digital lenders and incumbents implement this guideline in a manner true to the spirit of the regulation, and the impact it has on consumers' mindsets when taking loans", added Kumar.

Clear Audit Trails

RBI made the norms that digital lenders gathering customer information will currently have to get clients' consent and can acquire need-based information. Additionally, there should be clear audit trails and a choice to erase the information gathered from borrowers.

Aditya Kumar said, "These audit trails are a good first step to ensure banks and NBFCs regulated by RBI can drive periodic reviews of the conduct of DLA and loan service providers to ensure adherence to the recommended code of conduct."

The RBI is also stated to lay down basic technology standards for DLAs in terms of:

• Keeping an auditable log of every action that a user has performed

• Keeping a log of their IP addresses & device information

• Secure application with respect to the technical specifications of the DLA

• Monitoring of the transactions which are undertaken by the DLA

• Multi-step approval for critical activities which are undertaken by the DLA

"DLAs are also mandated to reflect these standards in the DLAs Terms of Service. Further to that, DLAs & Lending Service Providers (LSPs) have been asked to not store extensive personal information on their servers thus further empowering customers to take charge of their personal information by providing them with the opportunity to delete their personal data stored with LSPs & DLAs", said Kumar.

He further said, "The RBI guidelines on digital lending have really kept customers at the forefront. Although some digital lending apps may face some short-term difficulties while implementing the proposed guidelines, the RBI guidelines have rightfully acknowledged some of the risks attached to the rapid, unsupervised growth of DLAs whilst ensuring the safety and security of the consumers. The guidelines however are also clear indicators of the significant role digital lending apps and LSPs have played in the development of the digital lending landscape in India and how they have propelled financial inclusion for the underbanked within the country."