On June 24, 2020, the Reserve Bank of India (RBI) issued instructions on “Loans from banks and NBFCs on digital lending platforms: adherence to the code of fair practices and outsourcing guidelines(Instructions) to commercial banks (Banks) and non-bank financial corporations (NBFCs) scheduled regarding their engagement with digital lending platforms for disbursement of loans to borrowers.
The instructions were issued primarily to reiterate the requirements for compliance with the existing regulatory framework for outsourcing of services and the Code of Fair Practices by banks and NBFCs (both traditional NBFCs using physical channels for granting credit, and NBFCs registered to operate as ‘digital-only lending entities’). According to the RBI, the need for these instructions has arisen due to an increase in complaints received by the RBI against lending platforms. These complaints mainly concern exorbitant interest rates, non-transparent interest calculation methods, harsh collection actions, unauthorized use of personal data and bad behavior. The RBI has also observed that lending platforms often tend to present themselves as lenders without disclosing the name of the bank or NBFC in question to the customer, so that customers cannot access the remedies available in them. the regulatory framework. .
In order to ensure transparency for clients, RBI insisted on the primary responsibility of banks and NBFCs in the outsourcing of financial and information technology services and requested banks and NBFCs to comply meticulously with the instructions from the existing regulatory framework.
Some of the key aspects highlighted by the RBI for compliance are: (a) disclosure of the names of digital lending platforms engaged as agents on the banks / NBFC website; (b) require digital lending platforms to disclose the name of the bank / NBFC to the customer upfront; (c) issuance of sanction letter to borrower on Bank / NBFC letterhead immediately after sanction but before execution of loan agreement; (d) provide a copy of the loan agreement and all annexes to this agreement at the time of sanctioning or disbursement of loans; (e) ensure effective monitoring and follow-up of digital lending platforms engaged by banks / NBFCs; and (f) make adequate efforts to publicize the grievance mechanism.
While the RBI has not prescribed specific criminal consequences for violating the aforementioned requirements, it has stated that any violation by banks and NBFCs will be taken seriously.
The increased proliferation of mobile internet and smartphones has spurred the growth of fintech lending companies in India. A fully digital financial services experience is offered by fintech players, allowing the new age client to benefit from loans in minutes. After the RBI imposed severe restrictions on the operation of peer-to-peer (P2P) lending platforms in 2017 (and brought these platforms into its regulatory scope by requiring them to register as NBFCs -P2P), various online lending platforms have restricted the participation of the unregulated. retail lenders. The RBI had also clarified that electronic platforms that only help banks, NBFCs and other regulated financial institutions identify borrowers would not be treated as NBFC-P2P. Therefore, fintech lending platforms limited their lender base to only regulated entities and acted as business correspondents or sales agents for banks and NBFCs. Therefore, these lending platforms have provided various facilitation services to banks and NBFCs, including services related to client onboarding and know your customer (KYC) verification, customer analysis. credit risk, loan disbursement and loan collection for banks and NBFCs.
The existing regulatory framework applicable to banks and NBFCs on outsourcing services to third parties and respecting fair practices already contains a solid set of instructions. With these guidelines, the RBI is looking for a better interface between lenders (banks and NBFC) and their customers who are supplied through these lending platforms. It is relevant to note that the RBI does not intend to integrate these digital lending platforms within its regulatory scope and sees them as mere intermediaries providing technology-based solutions. Instead, the RBI has only reiterated that the responsibility for regulatory compliance rests solely with banks and NBFCs, which are directly regulated by the RBI.
In terms of the impact of these directions, banks and NBFCs operating in the digital lending segment might see increased inspection of their outsourcing arrangements with lending platforms. The RBI may also require changes to existing outsourcing agreements executed by banks and NBFCs, including providing clients with access to the banks and NBFCs grievance system. Digital lending platforms may need to review and modify their customer onboarding processes and associated technology processes to ensure that a specified lender is identified in advance prior to loan disbursement (while securing the exclusivity of the client in its agreements with lenders). Lenders are also likely to insist on digital lending platform technology solutions to ensure that they comply with specific loan documentation requirements prescribed in the instructions.
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