Just as industry was pulling down its shutters for the Independence Day long weekend, the Reserve Bank of India has issued a press release conveying the regulatory stance on many aspects concerning digital lending. As keen observers of the space would know, the RBI Working Group on Digital Lending had, on November 18, 2021, issued a detailed report with recommendations spanning the entire breadth of the digital lending ecosystem and RBI’s consideration of and implementation of these recommendations have been much awaited.
The Press Release is the first tranche of the recommendations being implemented– it also notes certain other recommendations which are acceptable in principle but are under further examination and others which require liaising and consultation with a wider set of stakeholders.
While issued as a press release, with directions to follow, the RBI has clarified that the lending entities regulated by it (REs), should note that the current regulatory stance of the RBI is being conveyed for implementation. The Press Release also reiterates that the onus of compliance with the regulations by loan service providers (LSPs) and digital lending applications (DLAs) will be that of the RE(s) concerned.
As we wait for the further fine print, set out below are the top 5 takeaways:
1. MONEY FLOW BETWEEN RE AND BORROWER TO BE DIRECT
A. Disbursement only into the bank account of the Borrower
Regulated entities will need to ensure that loans are disbursed directly into the ‘bank account’ of the borrowers. This requirement will impact the practice of disbursement of digital loans into prepaid payment instruments; an area which was already impacted by RBI’s recent directions clarifying that prepaid payment instruments should not be loaded with a credit line. On the face of the recommendation, this will also impact disbursement of digital loans to the bank account of a third party towards the intended end use (e.g. disbursal to the electronic retailer where the loan is being disbursed digitally for a customer availing of a consumer durables loan to purchase a mobile phone).
However, a clearer picture on the above will emerge on issuance of the actual directions – the press release does note that ‘exceptions would be considered for disbursals covered exclusively under statutory or regulatory mandate, flow of money between REs for co-lending transactions, and disbursals where loans are mandated for specified end -use as per regulatory guidelines of RBI or of any other regulator’.
B. No Passthrough for Repayment
REs are required to ensure that all loan repayments are directly executed into the bank account of the RE without any pass-through or pool account of any third party being utilized in such transfer.
This will require reworking of several existing models where escrow/ pool accounts are maintained and administered by LSPs who undertake collection activities on behalf of the REs who lend on their platform.
2. FATE OF FLDGS
While the recommendation on preventing FLDGs by LSPs to REs altogether is stated as being under examination, in the ‘meanwhile’ the Press Release requires REs to ensure that financial products involving contractual agreement, in which a third party guarantees to compensate up to a certain percentage of default in a loan portfolio of the RE, shall adhere to RBI Securitisation Guidelines. While the exact requirement being referred to in the Securitisation Guidelines is not expressly spelt out and further clarity is needed, it appears that the intent of the RBI is to limit the maximum percentage of default in a portfolio an FLDG should cover. Under the Securitisation Guidelines, an originator’s aggregate exposure is capped at 20% of the total securitisation exposure.
3. APR TRANSPARENCY AND FREE LOOK PERIOD
One of the key drivers for forming the original working group was to curb the practice of opaque and usurious pricing of credit. The Press Release accepts the recommendations for transparently and clearly conveying the terms of the lending in the form of a key fact statement to be displayed to the borrower which should in any event clearly mention the all-inclusive cost of the digital loan i.e. the APR. Notably, no fees or charges other than as mentioned in the key fact statement can be charged by the RE and all fees and charges are to be paid directly to the RE as opposed to the LSP.
In addition, a free look period is also prescribed within which a borrower can exit the digital loan by payment of the principal and amount together with the proportionate APR without requiring to pay any prepayment or similar penalty.
4. CUSTOMER DATA PRIVACY AND DATA LOCALISATION
The protection of customer data is also a key theme of the Press Release; both in terms of data privacy as well as data security. The Press Release also specifically notes that responsibility regarding data privacy and data security (including where the data may have been collected by the LSP) will be that of the RE.
DLAs are permitted to collect only such data from customers which is ‘need-based’ and are required to desist from accessing mobile phone resources of a customer. Further, there are additional requirements all of which aim to give the borrower more control over the data furnished by it to the DLA, including the right to withdraw consent, the right to be forgotten and the right to deny sharing of data with third parties.
Additionally, the RBI has also mandated that all customer data be stored by REs in servers located in India.
5. BNPL = LENDING = CREDIT BUREAU REPORTING
As expected, the RBI has accepted the recommendation for new digital lending products extended by REs over a merchant platform involving short term, unsecured/secured credits or deferred payments to be reported to credit bureaus. This is a reaffirmation of RBI’s previous position that BNPL is lending.
In summary, the Press Release is a good first step towards a formal regime towards digital lending which will hopefully form the basis for encouraging growth and innovation of the ecosystem but with the necessary guard rails. Like with any new regime, there are several nuances and grey areas which will hopefully be plugged through meaningful regulator industry collaboration in the coming weeks and months.