Context:
The Reserve Bank of India (RBI) released new digital lending norms earlier this month impacting credit guarantee schemes for MSME loans. Most MSME loans are currently covered under credit guarantee schemes which offer zero risk weight and encourage lending at competitive interest rates.
RBI Directions on Digital Lending
The Reserve Bank of India (RBI) issued comprehensive directions to regulate the digital lending ecosystem with the aim of enhancing borrower protection, promoting transparency, and ensuring responsible digital lending practices.
Key Objectives
- Strengthen borrower protection in digital financial services
- Promote transparency and accountability in digital lending operations
- Ensure responsible lending practices among regulated entities and third-party service providers
- Prevent misuse by unauthorized or rogue digital lending apps
Definition of Digital Lending
- A remote and automated lending process using digital platforms for:
- Customer acquisition
- Credit assessment
- Loan approval
- Disbursement
- Servicing and repayment
- Recovery of loans
Entities Covered
The directions apply to:
- Commercial Banks
- Primary (Urban)/State/Central Co-operative Banks
- Non-Banking Financial Companies (NBFCs) including Housing Finance Companies
- All-India Financial Institutions
Key Features and Provisions
Mandatory Reporting of Digital Lending Apps (DLAs)
- All regulated financial entities must report their DLAs to the RBI through the Centralized Information Management System (CIMS) Portal
- Objective: Create a public directory of legitimate digital lending apps to ensure user safety and prevent fraud
Due Diligence on Lending Service Providers (LSPs)
- Financial entities must conduct enhanced due diligence on LSPs with focus on:
- Technical capabilities
- Data protection and privacy standards
- Borrower engagement conduct
- Regulatory compliance
Role of LSPs
- LSPs act as agents of financial entities and perform various digital lending functions on their behalf
- Financial entities are fully accountable for the actions of their LSPs
Mandatory Disclosures to Borrowers
- Lenders and LSPs must provide upfront disclosures including:
- Loan terms and conditions
- Interest rates, fees, and charges
- Privacy policies
- Key Fact Statements (KFS)
Grievance Redressal Mechanism
- All LSPs must appoint a Grievance Redressal Officer (GRO)
- Borrowers must be informed of the GRO’s contact details
- Financial entities remain responsible for resolving complaints raised through LSPs
Significance
- Builds consumer trust in digital lending platforms
- Eliminates predatory lending and harassment by unauthorized apps
- Aligns with RBI’s goal of secure, inclusive, and regulated fintech development
- Supports the development of a transparent and fair digital credit ecosystem
Key Regulatory Change
- RBI guidelines now prohibit regulated entities (REs), including NBFCs, from entering into default loss guarantee (DLG) arrangements on loans covered by credit guarantee schemes.
- DLGs are contractual agreements where a third party guarantees compensation for loan defaults up to a certain percentage (usually 5%).
Implications for NBFCs and MSME Lending
- Without DLG protection, NBFCs must bear full loss on defaulted MSME loans, increasing their risk exposure and provisioning requirements.
- This is expected to lead to higher lending rates for MSMEs. For example, a loan previously priced at 12% interest might increase to around 15% due to additional loss provisions.
- NBFC officials say MSME loans, a sensitive and government-prioritized segment, will become more expensive due to loss of DLG support.
