RBI Regulatory Framework for Digital Lending

Recently, the Reserve Bank of India (RBI) has issued detailed guidelines for digital lending according to which digital loans must be credited directly to the bank accounts of borrowers and not through any third party.
It is the first set of guidelines for digital lending, to crack down on illegal activities by certain players. This follows the recommendation of a Working Group on Digital Lending (WGDL) that had submitted its report recently.

Digital Lending:

It consists of lending through web platforms or mobile apps, by taking advantage of technology for authentication and credit assessment.
Banks have launched their own independent digital lending platforms to tap into the digital lending market by leveraging existing capabilities in traditional lending.
Significance:
Financial Inclusion: It helps in meeting the huge unmet credit need, particularly in the microenterprise and low-income consumer segment in India.
Reduce Borrowing from Informal Channels: It helps in reducing informal borrowings as it simplifies the process of borrowing.
Time Saving: It decreases time spent on working loan applications in-branch. Digital lending platforms have also been known to cut overhead costs by 30-50%.

Challenges:

A growing number of unauthorised digital lending platforms and mobile applications as:
They charge excessive rates of interest and additional hidden charges.
They adopt unacceptable and high-handed recovery methods.
They misuse agreements to access data on mobile phones of borrowers.

Who comes under these New Guidelines?

The central bank’s regulatory framework is focused on the digital lending ecosystem of regulated entities and the Lending Service Provider (LSPs) engaged by them to extend various permissible credit facilitation services.
The banking regulator has categorically specified that the lending business can only be carried out by entities regulated by the RBI or those permitted under the law.
The central bank has divided the universe of digital lenders into three groups namely:
Entities regulated by the RBI and permitted to carry out lending business.
Entities authorised to carry out lending according to other statutory/ regulatory provisions but not regulated by the RBI.
Entities lending outside the purview of any statutory/ regulatory provision.

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