Can the RBI digital lending norms be a game changer

The RBI recently released detailed guidelines for digital lending. Here are some of the key highlights of the new digital lending norms by the RBI. The digital lending business has broadly 3 types of entities. Firstly, there are the digital lenders that are regulated by the RBI. Secondly, there are the digital lenders that are not regulated, but are authorized by the RBI. Finally, there are the digital lenders that are outside the ambit of RBI regulation. The new digital lending norms only apply to the first category and not to the other two categories.
Key takeaways from the new RBI digital lending norms 
The idea of the digital lending regulations is to make the entire business more regulated, streamlined and safer for consumers to transact with.
    1) Under the guidelines, all digital loans must be disbursed and also repaid only through designated bank accounts of regulated entities (REs). Also, the pass-through of loan service providers (LSPs) or other agents will be done separately by the RE. 

    2) One of the major issue the digital lending regulations seek to address is the unbridled engagement of third parties. In addition, there is also the issue of mis-selling of digital lending products, breach of data privacy, exorbitant rates and unethical recovery means.

    3)  Broadly, the digital lending rules will regulate the RE i.e. the regulated lending entity and the LSP or the loan service provider. Specific set of rules to regulate these businesses will be issued separately by the RBI at a micro level.

    4) The digital lending norms also stipulate that any fees or reimbursement of costs to the LSP cannot be done by the customer or the borrower. It has to be a bipartite transaction between the RE and the LSP only. 

    5) In a related development, it has been stipulated that the borrower be provided with a standardised key fact statement (KFS) before executing the loan contract. The total cost of digital loans in annual percentage rate (APR) must be disclosed to borrowers. 

    6) To avoid the borrowers being drawn into higher debt burdens, the digital lending norms clearly stipulate that automatic increases in credit limit without the explicit consent of borrowers would be strictly prohibited by the RBI extant regulations.

    7) The rules also stipulate that the loan contract must provide for a cooling-off or a typical free-look period. During this period, the borrower must be allowed to exit the digital loans by paying the principal and the proportionate APR without penalty. 

    8) REs and the LSPs must have suitable qualifications for discharging their duties and appropriately advising the borrowers. The RE will have to ensure that even the LSP has a suitable grievance redressal officer to deal with complaints related to digital lending.

    9) The digital lending norms also stipulate that if any complaint lodged by the borrower is not resolved by the RE within the stipulated 30-day period, the customer can directly lodge a complaint under the RBI integrated ombudsman scheme.

    10) A very important rule stipulated in the digital lending norms is that the data collected by the borrowers and the loan agents should only be need-based and possess clear audit trails. Any data storage must only be done with the explicit consent of the borrower.

    11) In an important move, the RBI has made it mandatory that any lending that is sourced through DLAs will have to be reported to credit bureaus by REs irrespective of its nature or tenor. That is not happening currently, allowing a lot of borrowers with low credit score to also avail loans. This will have an impact on the CIBIL score of the borrower.
Digital lending is an idea whose time has come. However, for the growth to be meaningful and orderly, a solid regulatory framework is necessary. That is what the RBI has attempted through this norms. Hopefully, these norms when implemented, should make the digital lending arena safer, sounder and also stronger.