Highlighting implementation challenges with the Digital Lending Guidelines to the Reserve Bank of India (RBI)

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Highlighting implementation challenges with the Digital Lending Guidelines to the Reserve Bank of India (RBI)

Garima Prakash

@GarimaP

November 30, 2022

Public Policy

287

On November 28, 2022, we submitted a representation to RBI highlighting the challenges being faced by the industry in the implementation of the Digital Lending Guidelines (DL Guidelines).[1]

Background

A Report of the Working Group on Digital Lending including Lending through Online Platforms and Mobile Apps (DL Report) was published in November 2021.[2] This report aimed at giving recommendations to protect the integrity of the digital lending system against entities that are not authorised to carry out lending business. The report also highlighted that one of the principles for evaluating the digital lending space is to regulate in a technologically neutral manner, i.e., neutrality towards technological differentials or business models.

Thereafter, the DL Guidelines were published by the RBI in September 2022 with the objective of regulating digital lending activities to protect customers from unethical practices and protect the integrity of the digital lending system from entities that are not regulated. DL Guidelines came into effect immediately after publication for new customers getting onboarded. To ensure a smooth transition for existing digital loans, time till November 30, 2022, was given to put in place adequate systems and processes to ensure compliance.

Issues and Recommendations

Involvement of third parties for flow of funds: Paragraph 3 of the DL Guidelines does not allow for certain use-cases involving entities other than the lender and borrower in the repayment of digital loan amounts. For example, there may be a situation where the lending service provider for a buyer in an e-commerce transaction, is also providing services as a Payment Aggregator (PA) to the seller. Here, the loan taken by the buyer is transferred by the lender to the seller’s PA, who ultimately settles the funds with the seller. Similarly, there may be a situation where a third entity is authorised by the borrower to repay the loan amount to the lender. For example, an employee may direct the employer to direct the salary towards repayment of employee’s loan.

Recommendation: We have requested the RBI to create carve-outs for PAs and third-party entities authorised by the borrower to be involved in the loan disbursal and repayment transactions.

Broad data localisation mandate: Paragraph 11.4 of the DL Guidelines mandates regulated entities to ensure that all data is stored only in servers located in India. This requirement appears to be disproportionate and not based on risk assessment. The cost of compliance with such a broad data localisation mandate can be detrimental for the industry.

Recommendation: We have requested the RBI to explain the reasons for a broad data localisation requirement under the DL Guidelines and to deliberate with the industry before such a requirement is implemented so that alternative risk mitigation measures can be evaluated.

For more information, kindly write to garima@nasscom.in.

[1] Digital Lending Guidelines, September 2, 2022, available at https://rbidocs.rbi.org.in/rdocs/notification/PDFs/GUIDELINESDIGITALLENDINGD5C35A71D8124A0E92AEB940A7D25BB3.PDF.

[2] Report of the Working Group on Digital Lending including Lending through Online Platforms and Mobile Apps, November 18, 2021, available at: https://rbidocs.rbi.org.in/rdocs/PublicationReport/Pdfs/DIGITALLENDINGF6A90CA76A9B4B3E84AA0EBD24B307F1.PDF.

RBI Fintech Digital Lending data localisation payment aggregators

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Garima Prakash

Manager, Public Policy and Government Affairs

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