RBI’s New Digital Lending Guidelines are Important For the Fintech Field
We know from fintech news in India news sources that recently, the RBI or Reserve Bank of India has announced the Guidelines on Digital Lending to both banks and NBFCs (non-banking financial companies), which provide loans through digital lending platforms. This followed the press release that was issued by the RBI.
This was done according to the implementation of the recommendations that came from the Working Group set up by the RBI in 2021 in order to study the market practices that followed in the digital lending industry.
How Are The Digital Lending Guidelines Changing The Fintech Field?
Fintech sources point out that the fintech companies, especially which operated digital lending platforms usually offered unique credit products which were made according to the requirements of a specific user base. These platforms became popular in a short period of time, more after the COVID-19 lockdowns. Such digital lending platforms used alternative data which was for credit assessment and they devised completely digital customer onboarding and also loan disbursement processes.
As only banks and some licensed NBFCs had legitimate access to the capital, fintech companies used to enter into partnerships with these lenders who outsourced customer acquisition, loan recovery, and portfolio monitoring functions to them.
In due course of time, there were increasing cases of borrower harassment that were reported for the loans that were availed through these digital lending platforms. As a result, the RBI had to take notice of the growing digital lending industry, and also closely monitor the arrangements that were entered into by regulated lenders and also the technology companies that were operating the digital lending platforms. The RBI laid clear emphasis to protect digital lending borrowers. These borrowers were the worst affected parties due to several unethical practices, and also harsh recovery methods that were adopted by some digital lending platforms.
So, according to the new guidelines, regulatory measures like prescribing uniform T&C disclosure formats are to be adopted by all digital lenders, which will be permitting customers to exit the loan arrangement. This will be within a specific time period, it will prohibit hidden charges, and will be mandating the appointment of a nodal officer by the regulated lenders and the digital lending platforms in order to address customer complaints. The introduction of data minimization norms will also go a long way in increasing customer confidence and trust in digital lending platforms.
Further Changes Brought To The Digital Lending Field
Until now, digital lending in our country thrived because banks and other regulated lenders were always ready to provide capital. The capital was provided on the assurance that if the borrowers’ defaulted, they would be compensated by the fintech companies that are operating the digital lending platforms, and this was also sourcing new customers.
Such compensation arrangements were set up through FLDG (first loss default guarantee) arrangements. So, such credit comfort was offered and was commercially negotiated, especially based on the quality of the loan portfolio, besides other factors.
However, at the present, the RBI Working Group recommended a total ban on such arrangements. It viewed such credit comfort that was obtained from unregulated fintech companies were posing systemic risks to the market. News from fintech sources shows that it appears that the RBI accepted this recommendation because the digital lending guidelines effectively restrict any such FLDG arrangements. However, this could badly affect the access to capital for the fintech companies who are working towards the designing of new-age credit products and increasing offerings to the new-to-credit borrowers.
The RBI, here, as a prudent regulator intends to rectify any loopholes which may result in systemic risks to the financial ecosystem in India. The FLDG restriction, under the new digital lending guidelines, can lead to the slow death of many digital lending platforms. This would also drastically impact the financial inclusion efforts made by the RBI, as regulated lenders would be less incentivized in order to support new fintech companies which are innovating in this space.
However, the fintech news in India points out that, as a whole, the new digital lending guidelines will help to streamline and also standardize the digital lending practices which are relating to customer transparency and also data collection. The restrictions on the FLDG could force fintech companies to change their strategy. However, some market players cannot have the means for directly obtaining lending licenses and funding their customers by using their own capital. Thus, the fintech companies, here, may have to explore the adoption of public market infrastructures like the account aggregator network and the open credit enablement network in order to survive in this excessively competitive and evolving market.
