NBFCs To Bring Digital Loan Under RBI Rules Will Safeguard Consumer Data

The Reserve Bank of India (RBI) has asked banks and NBFCs (Non-Banking Financial Companies) to bring lending through digital mediums under the amended rules. For this, they have been given time till November 30 to make arrangements. The objective of this initiative is to protect the interest of the customers.

Joginder Rana, MD and Vice Chairman, CASHe said, "The Reserve Bank of India has neatly laid out the appropriate guidelines for LSPs to follow. The world of digital lending is undergoing the most critical and necessary shift of all time, and we couldn't be more appreciative to the RBI for paving the way toward innovation."

Donald D'Souza, MD and Co-Head, Investment Banking, Equirus said, "We want to analyse this from two lenses; one as a regulator and the second as a regulated entity;  as a regulator, it was important to establish some ground rules to ensure that customers, as well as the credit ecosystem, are protected. Currently, only about 10 per cent of loans are originated digitally by NBFCs banks; we believe this contribution may expand upwards of 40+ per cent over the next 5 years, coupled with an expected CAGR of 25 per cent of the personal loan market we expect retail digital lending to expand to more than USD 60 Bn opportunity. Thus, as a regulator, these regulations needed to be implemented post haste."

He added that as a regulated entity one would welcome the change as it creates transparency and trust within the credit ecosystem. Moreover, it levels the playing field, eliminates unethical practices of recovery and allows fair competition to weed out usurious pricing. We also understand that major LSPs in the system were already sensitised by their lending partners.

Changes NBFCs Will Adopt

The RBI had said in a circular that outsourcing arrangements of regulated entities (banks and NBFCs) with Credit Service Providers (LSPs)/Digital Loan Apps (DLAs) do not reduce their obligations.

Rana on this said that the old distribution and organisation model, and the new age asset model are indispensable and the need of the hour. The evolution of DITA is applauded because going forward, all unapproved apps will be closely supervised and instances of unauthorised lending will drastically decrease, making room for ethical online lenders.

The regulated entities shall ensure that the outsourcing institutions adhere to the extant guidelines. It has been said in the circular that the instructions will apply to existing customers taking new loans and new customers.

D'Souza said, "Small changes may need to be made to accommodate requirements like Key Fact Statement, automatic increase in credit limit, and incorporation of a cooling condition. However, most of these changes are operational and can be automated without much difficulty. Also, REs have been following these norms in some form on another like bank already provide a summary term sheet and sanction letter which states the terms and conditions of a loan much like a KFS would."

To Protect Customers' Interest

The RBI said that it has taken this step to protect the interest of the customers. Under the new arrangement, all loan disbursement and payments would need to be made only between the bank accounts of the borrower and the regulated entities. There is no need to use the 'pool' account of the loan service providers.

"The norms will compel the lenders to reveal their data, credit assessment and underwriting techniques, and offer borrowers complete control over their personal data. Besides financial and operational discipline, it will aid in building customer confidence in the digital lending ecosystem and increase their willingness to explore newer avenues and will ultimately benefit the larger goal of financial inclusivity for all", said Rana.

In the circular issued on August 10, RBI said that also, if any fee etc. is to be paid in the lending process, it will be given by the regulated entities and not the borrower.

The establishment of such a regulatory framework became necessary following numerous complaints by borrowers against various digital lending businesses and the potential of common customers being exploited if it was left unregulated.

D'Souza said, "We believe it should spur the demand for credit within a system. New-age lenders have evolved beyond the traditional parameterised approach and use alternate data points to sanction credit. We believe this should help bring more and more customers into the credit fold. Also, we understand that customers will have more control over their data with a mandated consent layer required by each party before a customer’s data is shared."

Would Customers Face Difficulties?

Implementation of any new rules can make a consumer think about whether he will have to face some inconvenience due to it. But as RBI has mentioned that the rules brought for NBFCs are for customers' interest, and there could not be any difficulties they would face ahead.

D'Souza said, "The main value proposition of digital loans is convenience, we believe RBI has acted in the favour of the customer and in case of any issues given how dynamic the sector is. RBI will anticipate and be at the forefront of the issues. But it was important to be clear about dos and don’ts for the sector and the onus clearly on the regulated entities."

Rana on this said, "Everything has benefits and drawbacks. Our customers are at the centre of how we design our products and services, but now with access to data being restricted for regulated entities as well, gauging customer expectations and building customised offerings will be a challenge. Additionally, too much data transparency and knowledge of underwriting norms will breed rogue elements who will try to game the system and therefore regulatory entities and banks should consider tightening their fraud control systems in the future."

Under the new arrangement, all loan disbursement and payments would need to be made only between the bank accounts of the borrower and the regulated entities. There is no need to use the 'pool' account of the loan service providers.