RBI’s stance on Digital lending : A New Prospect for Borrowings in India?

Introduction

For day to day financial operations, digital banking has recently evolved into a new market in India. The process is simpler in terms of formalities and procedures which have to be completed in order to obtain a loan from a base branch of Bank. With this novel method of developing and offering credit to borrowers, some challenges have emerged that, if not addressed, may diminish people’s confidence in the system of digital financing. Some of the primary concerns include the use of third – party vendors, charging high rates of interest, unfair business practises, unethical recovery techniques, data privacy infringements, etc.

RBI Stance of Digital Leading

The Reserve Bank of India (RBI) has recently reaffirmed in its guidelines for commercial banks, primary (urban) cooperative banks, state co-operative banks, district central co-operative banks, and NBFCs (including housing finance companies) that the obligations of Regulated Entities (REs) will not get diminished by way of outsourcing agreements with a Lending Service Provider (LSP)/ Digital Lending Affiliation (DLA).

Lack of Regulations Resulting in a Lack of Confidence

The mode of digital lending has set forth a number of flaws as well, just like any emerging market segment of an economy. Unauthorized lenders have engaged in a number of unethical practises, particularly during the epidemic, including giving consumers loans without any type of security, at excessive rates, and with arbitrary deadlines for repaying these huge debts. As a result, when borrowers couldn’t pay back these loans, lenders were forced to recall them. Such occurrences undermine consumer confidence and ultimately hinder the expansion of fintech businesses.

The Digital Lending Association of India has also established guidelines prohibiting such criminal acts by unauthorised digital loan applications in light of this[1]. Regulation in this field is becoming more and more necessary to prevent the emergence of the unlawful players indicated above. There should be strict rules that are enforceable by law. To guarantee that consumer confidence is not restrained, regulation in this sector needs to be put into place as quickly as possible.

What does this mean for the Industry and Potential Borrowers?

The RBI has established guidance on the regulatory framework, technology and data needs, and requirements for conduct and consumer protection.  The Regulated Entities (RE), Digital Lending Apps/Platforms (DLAs), and Lending Service Provider are the three parties that the RBI defines in this regard (LSP). All commercial and cooperative banks as well as non-banking financial institutions are included in the REs. The LSP performs lender tasks including customer acquisition, monitoring, recovery, etc. on behalf of the RE. The DLAs are websites or mobile applications that offer loans to its consumers; this includes both the RE’s applications and the LSP for the credit facility.

According to the RBI, there will be no involvement of a third party in the transaction and the lenders will immediately disburse the loan to the borrower’s account[2]. The lending platform is required to develop a Key Fact Statement that contains all necessary information, information on how to file a complaint, and any fees. If the charges or fees are not specified, the borrower cannot be subjected to them. Each RBI-regulated organisation would be required to designate a nodal grievance redressal officer, who must be clearly identified on the website and accessible to customers.

The U.S. Consumer Bill of Rights, which the Supreme Court mostly upholds, served as the foundation for consumer law jurisprudence. The “Consumer Bill of Rights,” established by US President John F. Kennedy in 1962, focused on a number of consumer protection rights, including the rights to safety, information, education, and the right to be addressed[3]. The Section 2(9) of the Consumer Protection Act also acknowledges the numerous consumer rights, which include the right to information, the right to protection, the right to assurance, the right to be heard, the right to remedy, and the right to consumer awareness. As a result, every consumer has the right to information about a product or service as well as the right to file a complaint and receive remedy. Thus, it can be rightly said that the RBI’s rules are compatible with consumer protection laws.

The RBI has mandated that borrower data must only be obtained when necessary and with permission. Lending platforms have been made aware that they are unable to access cellphone data, including call logs, contact lists, etc. The platforms can only store the borrower’s name and address as well as the barest of data. The registered organisations are required to establish a thorough privacy policy and to prescribe to the lending platforms a policy for data preservation. This complies with the Puttaswamy case’s[4] data minimization principle, which argues that information should only be acquired when it is pertinent and required for any given reason. The Credit Information Companies (CIC) (Regulation) Act of 2005 established the Credit Information Companies as the regulating body for such platforms. All mobile app transactions must be reported to the CIC, and this is the responsibility of the regulated firms. As a result, these mobile applications would have a check and balance.

Conclusion

The RBI’s measures will help to protect customers and ensure that genuine mobile apps survive the market. The regulation of digital lending, which is a crucial component of the nation’s credit system, was urgently needed. The RBI’s notification from September 2, 2022 addresses a number of problems for borrowers, including exorbitant interest rates, violation of their privacy, and the redress process. Fake applications or applications controlled by entities that do not fit the definition of RE, LSP, or DLA are among the problems that still exist, nonetheless. What recourse would borrowers have against these platforms in the unlikely event that these apps are not governed by the RBI remains to be seen. The RBI must develop a system whereby phoney apps or unregulated apps that breach consumer rights are forewarned of or removed from online stores in collaboration with the Ministry of Information Technology. This process must be in accordance with other regulations, such as the Information Technology Act of 2000 and the Information Technology Intermediary Rules of 2021, which require intermediaries to exercise the required due diligence.

Author: Mayank Shyamsukha, student at Institute of Law, Nirma University, in case of any queries please contact/write back to us via email to chhavi@khuranaandkhurana.com or at  Khurana & Khurana, Advocates and IP Attorney.

[1] DLAI. “DLAI in the Press – DLAI.” Accessed November 2022. https://www.dlai.in/dlai-in-the-press/

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

[3] Mass.gov. “Consumer Bill of Rights.” Accessed November 5, 2022. https://www.mass.gov/service-details/consumer-bill-of-rights.

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

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