The Reserve Bank of India has released a set of new rules that aims to curtail the rising number of fraudulent transactions reported on loan apps, in addition to reports of exorbitant interest rates and unethical recovery practices. These guidelines aim to tighten the oversight around the lending mechanisms in the digital world.
The Bank says loan disbursals and repayments can now only be made via bank accounts belonging to the borrowers and regulated entities such as banks and NBFCs. The rules say that there would be no more pass throughs or pool accounts of the lending service providers.
It appears to be about fixing responsibility
The regulations also insist that the fees paid to the lending apps need to be borne by the regulated entities and not the borrower. It also prohibited automatic increases in credit limit without consent of the borrower, something that credit card agencies have been doing for years now with impunity.
However the apex bank took pains to state that it was not attempting to stifle the fintech innovations that have resulted in easier availability of money to a wider section of the population. It claimed that the new set of rules came from the major concern that was brought up around the unbridled engagement of third parties, mis-selling and breach of data privacy.
No intention to squeeze the Fintech sector
While the intention is not to stymie the fintech segment, RBI underscored the need for certain guidelines to protect consumer interest. In the past, unbridled innovation had resulted in several fake apps coming up. However, this time the onus on guarding against such occurrence is also with the regulated entities.
Most of these changes are based on the recommendations of a working group that RBI had set up last year to assess governance issues and consumer complaints around digital lending platforms.
In addition to the regulations, RBI has also submitted some recommendations to the government that includes banning unregulated lending activities. It remains to be seen how these rules and the recommendations can put a cap on fake loan apps. Industry experts feel that the government needs to empower RBI with some punitive powers to make things work.
Nageen Kommu, Founder & CEO, Digitap: “RBI’s guidelines on digital lending is a crucial development in the credit ecosystem, considering the rapid rise of profound credit tools and country’s progressive financial inclusion imperative. The guidelines which aim to tackle concerns like unscrupulous lending practises and involvement of third parties, mis-selling and data privacy. We have witnessed fintech players, making requisite tweaks in their business models to stay compliant with the RBI’s guidelines. Some players have updated their terms of agreements as well as related processes. While the new guidelines have increased the cost of compliance for fintechs, the incumbents have demonstrated a positive adoption. The involved stakeholders understand the potential of fintechs in country’s last-mile, effective credit delivery as well as the need for maintaining a compliant operational environment to usher a healthy and sustainable growth of the sector.”
Anil Pinapala, CEO and Founder, Vivifi Finance: “We welcome this move of the new digital lending norms by the RBI. At the core of RBI’s focus with these guidelines is the customer (or borrower). The guidelines ensure transparency in disclosures so that the customers fully understand all the information/data that is being accessed by the lending entities putting them in control of their own data while ensuring the companies follow all the data privacy guidelines. RBI has also standardised the cost disclosures with a uniform KFS that details an all-in APR (Annual Percentage Rate), which factors in all the fees and interest that are being charged to the customers, empowering them with the ability to compare this rate across banks and NBFCs. In other words, it makes it easy for the customers to understand the true cost of credit across lenders and make an informed decision.
Licensed and compliant players will have an edge over Fintechs with other NBFC partnerships, and are likely to see rising market share in the future. The RBI wants to ensure that there is responsibility on the institutions they regulate. For the unregulated entities classified as LSPs (Lending Service Providers) there is almost an equal burden to abide by these rules. As a result, we foresee some level of filtration as these guidelines go into effect. This decision by the RBI will protect the consumer and level the playing field from the customer’s perspective.”
Vaibhav Lodha, Co-founder of ftcash: “The RBI guidelines on digital lending came into effect to address increasing concerns around unchecked business conduct of third parties, data privacy issues, misselling and unethical recovery practices. RBI has ensured sustainable growth and responsible lending are at the forefront while championing innovation. As a result, most fintechs earlier focussed on asset light growth will focus towards acquiring license to lend and subsequently capitalising their NBFCs. These guidelines do adversely impact certain fintech players but builds a path for greater trust of customers in the long run. Temporarily it will increase the cost of compliances but it will weed out malafied players and allows fintechs to help build resilient business models. While some players may have to fundamentally change their operations, we gather from the industry leaders that they were geared up to make the required corrections to ensure complete compliance before the looming deadline.”
ftcash is an RBI-registered NBFC and responsible lending startup with an aim to empower over 60 million micro-merchants and small businesses by bridging the lending gap with accessible loans. Headquartered in Mumbai, ftcash was founded in 2015 by Sanjeev Chandak, Deepak Kothari and Vaibhav Lodha. The company creates an open architecture-based platform for merchants to initiate digital payments in less than five minutes by aggregating all payment methods including credit and debit cards, net banking, mobile wallets, UPI and PayPal. The company has more than 300 employees across eight states in India and over 60,000 merchants in its network. It has disbursed Rs 600 crore worth of loans till now. Ftcash is witnessing 22X growth in AUM since 2019. The company is expecting disbursals to grow 3X by 2023. ftcash is backed by several investors including Accion, FMO and IvyCap Ventures.
Avinash Godkhindi, MD & CEO, Zaggle:
The impact of RBI’s digital lending norms on the industry
The primary business models of fintech startups have altered. Zaggle has always taken the conservative route looking to generate a referral fee for leads shared post explicit consent of borrowers with regulated entities. Players whose business models called for disbursing loans into prepaid cards are trying to disburse loans straight into customers’ bank accounts but with limited success. Overall, the companies in the fintech space which are looking to operate in the “gray area” have been significantly impacted but other fintech players have not been impacted.
How is the sector prepared to meet the deadline
To comply with the Reserve Bank of India’s (RBI) new regulations, digital lending fintechs have made the required adjustments and are preparing for the next phase of consolidation. The industry is also getting ready to maintain its growth rate in a more challenging macroeconomic setting with increasing inflation and interest rates. Technical, procedural, and other adjustments have all been made, but in places where additional explanation is needed, people have opted for a more cautious approach rather than treading in the gray areas.
Zaggle is a SaaS Fintech company and a pioneer in digitizing business spends with over 1,750+ clients and over 1.7 million+ users. The company has offices across 7 cities with 250+ employees and is committed to bringing the best-in-class user experience to its users. It offers innovative solutions such as ‘Propel’, an employee rewards & recognition and channel incentivization solution and ‘Save’, an expense management. Zaggle has had a phenomenal growth journey, starting from a gross transaction value (GTV) of just Rs 4 crore in 2012, to a GTV of about Rs 15,000 crore per annum today.
Souparno Bagchi, COO, Balancehero India.: “RBI’s guidelines on digital lending paves way towards a secure, inclusive and accessible digital lending ecosystem. It empowers customers with full transparency about the information & data that is being accessed by the lenders, giving them control over their own personal information. The RBI has also standardized disclosures therefore, enabling customers to make more informed decisions . We anticipate some filtration when these suggestions take effect because it is the responsibility of all companies, including unregulated organizations classified as LSPs (Lending Service Providers), to adhere to these regulations.
Consumer protection, market integrity and a growth conducive environment for players are strengthened through initiatives like these. We believe that through the new guidelines, lending platforms can gain increased customer trust as well as be instrumental in financial inclusion.”