RBI Guidelines on Digital lending – A boon to the digital borrowers?

[By Sahana R]

The author is a student at the School of Law, Christ University, Bangalore.

Introduction

The process of providing loans on an online platform is termed to be digital lending. The distinction between digital lending and traditional lending methods would be using digital technologies regarding loan approval, repayment, and service. According to a study, there has been a significant rise in the number of apps in the Indian Digital Lending Market where the value of the market has increased from USD 33 Billion in FY15 to USD 150 Billion in FY20.[i]  The need for credit and the hassle-free approval of loans are the catalysts behind the growth of digital lending platforms on the internet as well as mobile phone apps. However, on the other hand, there exist certain banes with these platforms mainly because they were not regulated by the RBI or any other regulatory body and they would charge a very high rate of interest to the consumers. Therefore, there was a need for regulation of such lending service providers. This article provides an overview of the current digital lending situation and how the RBI has made an effort to regulate this online market.

Why was this regulation the need of the hour?

During the COVID-19 pandemic as people required money instantly, they resorted to using these mobile apps where instant loans were provided without verification of various documents. However, the downside to such loans was that the interest rates were very high and it was for a very short period. Additionally, other charges such as service charges, processing fees, etc. are levied on the consumers. In the case of Dharanidhar Karimoji v Union of India[ii], the petitioner filed a Public Interest Litigation requesting for the appropriate authority which is the RBI to regulate these mobile apps. The petitioner stated that there are more than 300 such apps on the play store and they charge about 35-45% of the loan money as processing fees. If the payment is not done within the time-period of the loan, then the agent will call the contacts of the borrower as the borrower would have provided various permissions including permission to access the contact list. Thus, there was a requirement for regulation.

Working group on digital lending

The RBI in January 2021 set up a working group on digital lending[iii] under the chairmanship of Shri Jayant Kumar Dash to assess the consumer issues and lending business of the platforms due to the outburst of many digital lending platforms. The report mainly focuses on protecting consumers from exorbitant interest rates and, at the same time, encouraging innovation in the digital lending sphere. The key takeaways from this report were as follows:

The group suggested that an independent body named Digital India Trust Agency (DIGITA) must be set up. The lenders are allowed to deploy only those apps verified by DIGITA. A Self-Regulatory Organization (SRO) is to be set up which would include all the Regulated Entities, Digital Lending Apps, and Lending Service Providers. The working group has also suggested a separate enactment to prevent illegal digital lending. The very important suggestion of the group was that the data can only be collected only after prior and informed consent of the users, and these data can be stored only by Indian servers. Lastly, the SRO, in consultation with the Reserve Bank of India, must come up with a Code of conduct for these apps.[iv]

Analysis of the RBI Guidelines on digital lending

The RBI has provided guidelines on consumer protection and conduct requirements, Technology, and data requirements, and the regulatory framework.[v] In this regard the RBI defines three parties namely, Regulated Entities (RE), Digital Lending Apps/Platforms (DLAs), and Lending Service Provider (LSP). The RE’s include all Commercial, cooperative banks as well as Non-Banking Financial Institutions. The LSP on behalf of the RE carry out functions of the lender such as customer acquisition, monitoring, recovery, etc. The DLAs are websites or mobile applications that provide loans to their users and this will include the applications owned by the RE as well as LSP for the credit facility.

The RBI stated that the lenders will directly disburse the loan to the borrower’s account, and no third party will be involved in the transaction. The Lending platform must create a Key Fact Statement which must include all necessary information, details of grievance redressal, and any charges. If the charges or fees are not mentioned, they cannot be levied on the borrower. Every regulated entity of the RBI will have to appoint a nodal grievance redressal officer, which must be prominently displayed on the website and available to consumers. The jurisprudence of consumer law began with the Consumer bill of rights in the United States, which the Supreme Court widely accepts. US President John Kennedy in 1962, introduced the ‘Consumer Bill of Rights’ which emphasized on various rights of the customers such as right to safety, right to be informed, right to education, right to be heard, and so on. Additionally, Section 2(9) of the Consumer Protection Act, 2019 recognizes the various consumer rights and includes the right to be informed, right to be protected, right to be assured, right to be heard, right to redressal and consumer awareness. Therefore, Every consumer has the right to information an about the service or the product, and he also has the right to seek redressal in case of any grievance. Thus, the guidelines by the RBI satisfy the requirements of Consumer protection law.

The RBI has stated that borrowers’ data must be taken only if needed and with consent. It has been made clear that lending platforms cannot access mobile data such as contact lists, calls, etc. The platforms can store only minimal data, such as the name and address of the borrower. The registered entities must prescribe a policy to the lending platforms concerning data storage and create a comprehensive privacy policy. This adheres to the principle of data minimization as laid down in the Puttaswamy case[vi], which states that only when the information is relevant and necessary for any purpose will it be collected. The regulatory authority for such platforms is the Credit Information Companies which is established under the Credit Information Companies (CIC) (Regulation) Act, 2005. The regulated entities must ensure that all transactions on the mobile apps are reported to the CIC. Therefore, there would be a check and balance on these mobile applications.

Conclusion

This move by the RBI will help in securing customers and also lead to genuine mobile apps surviving on the market. Digital lending is an essential facet of the credit system in the country, and the regulation of the same was the need of the hour. The September 2, 2022 notification by the RBI solves various issues of the borrowers, such as high-interest rates, invasion of their privacy, and the redressal mechanism. However, one of the issues that still subsists is with regard to fake applications or applications owned by entities that do not come under the definition of RE, LSP or DLA. The questions remain in the event that these apps do not come under the regulation of the RBI, what would be the recourse that the borrowers would have against these platforms. The RBI in consultation with the Ministry of Information technology must create a mechanism where fake apps or unregulated apps which violate the consumer rights are warned or restricted from the online stores. This procedure must be in consonance with the other laws such as the Information Technology Act 2000 and Information Technology Intermediary Rules 2021 where the intermediaries must conform to the due diligence prescribed.

[i] Sandeep Soni, Digital lending fraud: RBI cautions small businesses, individuals against unauthorised loan apps(Financial Express, December 23, 2020) https://www.financialexpress.com/industry/sme/msme-fin-digital-lending-fraud-rbi-cautions-small-businesses-individuals-against-unauthorised-loan-apps/2156101/.

[ii] W.P.(C) 680/2021.

[iii] Reserve Bank of India, Report of the Working Group on Digital Lending including through Online Platforms and Mobile Apps (Issued on November 18, 2021).

[iv] Reserve Bank of India, Press Releases, Recommendations of the working group – Implementation (Issued on August 10, 2022).

[v] Reserve Bank of India, Notifications, Guidelines on Digital Lending RBI/2022-23/111 (Issued on September 2, 2022).

[vi] K.S. Puttaswamy v. Union of India, (2017) 10 SCC 1 (India).

Comments

Leave a Reply

Your email address will not be published. Required fields are marked *

Contact Us

Kerwa Dam Road., 
National Law Institute University, Bhopal
Madhya Pradesh, India. 462044​.

write to us at – cbcl@nliu.ac.in