Looking for a Digital Loan? Here Are RBI Guidelines That You Need to Know

As the world is rapidly digitalising, the financial sector is not behind. Traditional brick-and-mortar banking has given way to digital banking, which has made accessing loans easier than ever before. With just a few clicks, borrowers can now apply for loans and get the funds disbursed to their accounts in no time.

However, this ease of access has also made it easier for fraudulent entities to dupe people into taking loans with high interest rates or hidden charges. To protect borrowers from such malpractices, the Reserve Bank of India (RBI) has laid down guidelines for digital lending platforms. Before opting for a digital loan, as a borrower, you should be aware of these guidelines, as it will help you avoid falling prey to such malpractices and make an informed decision.

Let's first understand what Digital Loans are:

Digital Loans are loans provided by financial institutions, including banks, NBFCs, and digital-only lenders (fintech companies) through a digital channel, such as a website or mobile app. The entire loan application, approval, disbursement, and repayment process is completed online. If the digital lender is not a bank or NBFC, it should be collaborating with one.

Banks have been providing digital loans for more than ten years, but it has recently become popular. Even conventional banks have begun providing digital loans to benefit from this expanding sector.

[Also Read: All You Need to Know About Digital Loans in India to know what are digital loans, the top reasons behind the digital loan boom in India, when should you opt for a digital loan, things to know before availing of a digital loan, how to identify disorganised and untrustworthy digital lending apps, tips to prevent falling prey to frauds when availing of a digital loan, common mistakes you could make when availing of a digital loan and how to avoid them, and how to apply for a digital loan.]

The recent regulations on digital lending, laid down in September 2022, were implemented due to worries mainly surrounding uncontrolled involvement of third parties, dishonest selling, violation of data privacy, unjust business behaviour, charging excessively high interest rates, and unethical debt collection practices. RBI has been endorsing originality in the financial system, merchandise, and credit distribution techniques, while maintaining their organised expansion, safeguarding financial stability, and guaranteeing the security of depositors' and customers' welfare.

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Here are the key RBI guidelines that you need to know before availing of a digital loan in India:

1. The definition of digital lending involves the use of seamless digital technologies to carry out processes in the life cycle of a loan, such as customer acquisition, credit assessment, loan approval, disbursement, recovery, and customer service. However, even if some physical interaction with the customer is present, the lending can still be considered digital lending as long as it is largely carried out through digital technologies. This flexibility is provided to lending institutions to ensure operational efficiency. However, lending institutions need to adhere to the intent of the guidelines while incorporating physical processes in digital lending.

2. The RBI specifies that all loan disbursements and repayments must take place exclusively between the bank accounts of the borrower and the lending institution (Regulated Entities), without involving any intermediate or third-party account, such as a pass-through or pool account of the Loan Service Provider (LSP). This measure aims to ensure that the borrower's funds are not misused or diverted and that the lending process is transparent and secure.

3. The RBI prohibits raising a borrower's credit limit automatically without their consent. This means that without the borrower's consent or request, the lending platform cannot increase the credit limit of their loan. This safeguard ensures that borrowers have full control over their loan amount and payback schedule and aims to protect them from being burdened with excessive debt responsibilities.

4. The RBI has instructed that any fees or charges that need to be paid to the LSPs during the credit intermediation process should be paid directly by the RE instead of the borrower. If any penal charges or interest are imposed on borrowers, they will be calculated based on the remaining loan amount. Additionally, the rate of such charges must be disclosed in advance on an annualised basis in the Key Fact Statement (KFS) provided to the borrower.

5. As part of the loan agreement, there will be a period of time, known as a cooling-off or look-up period, in which the borrowers can exit digital loans without facing any penalty. During this time, they will only need to pay the principal amount and the corresponding Annual Percentage Rate (APR).

6. Digital lending services will be made available through mobile and web-based applications that have user-friendly interfaces. These applications, referred to as DLAs, will include both apps developed by Regulated Entities (REs) and those operated by LSPs hired by REs to provide credit facilitation services in compliance with the outsourcing guidelines issued by the RBI.

7. Before entering into a contract for any digital lending products, REs must supply borrowers with a Key Fact Statement (KFS) in a uniform format. The layout for the KFS can be found in Annex II of the guidelines.

8. Regulated Entities must guarantee that digitally signed documents, such as the KFS, loan product summary, sanction letter, terms and conditions, account statements, and privacy policies of Lending Service Providers/Digital Lending Applications concerning borrower data, are automatically sent to borrowers via their verified email/SMS upon execution of the loan contract/transactions. These documents must be on the RE's letterhead.

9. REs must display a prominent list of their Digital Lending Applications, the Lending Service Providers they have engaged, and the DLAs operated by such LSPs on their website. This list must include details of the specific activities they have been engaged in.

10. Regulated Entities must ensure that their DLAs, or the DLAs of their LSPs, display essential information regarding product features, loan limits, costs, and other relevant details prominently during the onboarding/sign-up process. This will ensure that borrowers are fully informed about these aspects.

11. REs must inform the borrower about the recovery agent, who is authorised to approach them for recovery at the time of loan sanctioning and in case there is a change in the Lending Service Provider responsible for recovery. This communication must be provided to the borrower by the RE.

12. Not all Lending Service Providers are required to appoint a Grievance Redressal Officer. Only those LSPs who have direct contact with borrowers need to appoint a nodal Grievance Redressal Officer. However, it is important to note that the lending institution is still responsible for addressing and resolving complaints that arise from the actions of all LSPs engaged by them, regardless of whether they have appointed a Grievance Redressal Officer or not.

13. In general, it is not mandatory to include insurance charges in the calculation of the APR for all loan products. However, if insurance charges are linked or integrated into a loan product, then these charges should be included in the computation of APR. This is because such insurance charges are intrinsic to the nature of digital loans, and not including them in the calculation of APR would result in an incomplete or misleading representation of the actual cost of the loan. Therefore, it is important for lenders to carefully review the terms and conditions of their loan products to determine whether insurance charges are linked or integrated into the loan and, if so, to ensure that they are included in the calculation of APR in compliance with relevant regulatory guidelines.

To conclude:

The RBI guidelines for digital lending are a much-needed step to protect borrowers from mis-selling digital loans and ensure that they are aware of the terms and conditions of the loan. It is important for borrowers to educate themselves on these guidelines before applying for a digital loan and to choose a registered digital lending platform to ensure a safe and hassle-free borrowing experience.

KETKI JADHAV is a Content Writer at PersonalFN since August 2021. She is an MBA (Finance) and has over seven years of experience in Retail Banking. Ketki specialises in covering articles around banking, insurance, personal finance, and mutual funds and has been doing it for over three years now.