Authored by Mr Anuroop Omkar, Partner and Mr Tarun Singh Rathore, Associate- General Corporate
On February 14, 2023, the Reserve Bank of India (“RBI”) released the frequently asked questions on the Digital Lending Guidelines (“FAQ”). In the FAQs, RBI has clarified several points related to lending through digital mediums and the applicability of the Guidelines on Digital Lending numbered RBI/2022-23/111 DOR.CRE.REC.66/21.07.001/2022-23 (“Guidelines”) which were released on September 02, 2022.
The following note is a brief overview of such clarifications captured by RBI in the FAQs.
Clarifications and newly introduced changes under RBI released FAQs on Digital Lending
1. No exemptions from the guidelines for the partial use of physical processes in the lending transaction
No exemptions from digital lending guidelines for partial use of offline mode in the lending process are allowed. RBI has clarified that as long as digital technologies are used for even one of the processes involved in the lending process, the Guidelines shall apply despite the presence of some physical interface with the customers. RBI shall exercise full discretion over the applicability of the guidelines in hybrid methods of lending employing a mixture of both physical and digital modes.
2. Applicability to Lending Service Providers
RBI has tied in the applicability of the guidelines to any entity involved in lending through digital means. Every Lending Service Provider (“LSP”) at the time of onboarding new clients on its platform shall have to do an internal review. This review shall involve whether their client’s services fall within the ambit of digital lending i.e., largely using digital processes for lending.
It is important to mention here that fintech entities involved in providing services to Regulated entities (“REs”) have already initiated internal processes to apply these changes to their organization.
3. Application of Guidelines on EMI programs
Equated Monthly Installments (“EMIs”) on credit cards falling under Para 6(b)(iii) of the Master Direction on Credit Card and Debit Card – Issuance and Conduct, 2022 would remain outside the purview of the Digital Lending Guidelines.
Loans offered on debit cards, including EMI programs and loan products offered on credit cards which are not covered under the above-mentioned Master Directions would be governed by the Digital Lending Guidelines.
In certain instances, at the time of payments of credit card, credit card issuers are allowed an option to convert their payments to EMIs. It has now been clarified that these payments would not be covered by the Digital Lending Guidelines.
4. Websites/Mobile Applications to be covered under the guidelines
RBI has stated so long as lending falls within the definition of “Digital Lending” under the Guidelines irrespective of the medium on which this lending is carried, the guidelines would be applicable. Hence, REs carrying out lending through either websites/apps or both will be governed under the guidelines.
5. Appointment of Grievance Redressal Officer
RBI stated that entities shall be required to appoint a nodal Grievance Redressal Officer. According to RBI, only those LSPs which have an interface with the borrowers shall need to appoint a nodal Grievance Redressal Officer.
6. Inclusion of Insurance Charges in the Annual percentage rate in certain cases
RBI clarified that only in cases where the insurance is intrinsically linked to the loan, would necessitate its inclusion in the Annual Percentage Rate (“APR”).
In cases where insurance is optionally offered to the customers and they opt for such an option in addition to the loan, APR shall not include insurance charges in those cases.
7. Collection of cash by Recovery Agents
RBI has clarified that REs may deploy recovery agents to recover delinquent loans in cash from the customer and thus, exempt them from the requirement of direct repayment of loans in the RE’s bank account in such situations.
8. Recovery of fee from borrowers for cash recovery
In cases when recovery is taken by cash, it has been clarified that LSPs shall not charge the borrower for the recovery method adopted by them.
9. Disclosure of Recovery Agent to Delinquent Loan Mandatory
In cases where a loan has turned delinquent, it is the responsibility of the RE to convey the name of the recovery agent authorized to contact the borrower via SMS/email before the said recovery agent contacts the borrower for recovery purposes.
10. Payment Aggregators services allowed for loan disbursals
RBI has now clarified that Payment Aggregators (“PAs”) can be used for loan disbursals. Only those LSPs that are not PAs cannot have any direct or indirect control over the disbursal of loans. Further those PAs who in addition to providing Payment aggregation services also offer other tech services to REs shall have to comply with the obligations of LSPs under the Digital Lending Guidelines.
11. Loan disbursal on co-lending transactions exempted from direct disbursal rule
It has been clarified that co-lending transactions between two REs can claim exemption from these guidelines. It has also been made clear that this exemption shall not only apply to the priority sector but also to the non-priority sector as well. No person other than the REs should have control over the flow of funds.
12. Flow of funds cannot be controlled by the third party
RBI has clarified that no flow of funds between the bank accounts of borrower and lender in a lending transaction can be controlled directly or indirectly by a third party including LSP.
13. NBFC shall continue to disclose the annualized interest rate
RBI has stated that Non-Banking Financial Companies (“NBFCs”) also need to disclose the Annualized rate of interest to the borrowers as required under Fair Practices Code even if they are already disclosing APR in the Key Fact Statement (KFS).
14. Levy of Penal Charges
It has been clarified that any penal interest or charges levied on the borrowers shall only be based on the outstanding amount of the loan. RBI has further stated that the amount under default shall act as the ceiling on which the penal charges can be levied.
15. Refund of a processing fee is not mandatory
It has been clarified that a reasonable one-time processing fee can be retained by the REs if the customer exits the loan during the cooling-off period.
Scope Limitation: The note is based on the public information and information obtained from Notifications and Circulars issued by Regulatory bodies and is inclusive of the judicial and administrative interpretations thereof prevailing up to and inclusive of the date of this note.
Find the RBI notifications here:
FAQs on Digital Lending Guidelines: https://www.rbi.org.in/Scripts/FAQView.aspx?Id=155
Digital Lending Guidelines: https://rbi.org.in/Scripts/NotificationUser.aspx?Id=12382&Mode=0
Disclaimer
The note is prepared for knowledge dissemination and does not constitute legal, financial or commercial advice. AK & Partners or its associates are not responsible for any action taken based on its contents.
For further queries or details, you may contact:
Mr Anuroop Omkar,
Partner, AK & Partner