Reserve Bank of India Issues FAQs on the Digital Lending Guidelines

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Reserve Bank of India Issues FAQs on the Digital Lending Guidelines

Garima Prakash

@GarimaP

February 20, 2023

Public Policy

397

On February 14, 2023, Reserve Bank of India (RBI) published a set of Frequently Asked Questions (FAQs) to clarify the concerns of the industry related to the implementation of the Digital Lending Guidelines (DL Guidelines).

Background

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 illegitimate practices by unregulated entities. DL Guidelines came into effect immediately after publication, for the new customers getting onboarded onto digital lending applications. To ensure a smooth transition for the existing customers holding digital loans, time till November 30, 2022, was given to put in place adequate systems and processes to ensure compliance.

Thereafter, in November 2022 and January 2023, we had written to the RBI, highlighting the challenges being faced by the industry in the implementation of the Digital Lending Guidelines.

Concerns with the DL Guidelines

One of the challenges highlighted by NASSCOM included lack of clarity on whether involvement of Payment Aggregators (PAs) and third-party entities authorised by the borrower is allowed in the loan disbursal and repayment transactions. This clarity was needed because 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.

FAQs on the DL Guidelines

RBI’s FAQs provide clarity on the concerns raised above:

1. RBI has clarified that entities offering only PA services shall remain out of the ambit of ‘Guidelines on Digital Lending’. However, any PA also performing the role of a Lending Service Provider (LSP) must comply with the Digital Lending Guidelines. Meaning that, PAs can be involved in the loan repayment and disbursal process, if they are not functioning as an LSP. This is based on the underlying principle of the Digital Lending Guidelines that a LSP should not be involved in handling of funds flowing from the lender to the borrower or vice versa.

2. RBI has clarified that in certain cases involvement of third-parties is allowed in the repayment or disbursal of loan. Specifically, in cases where loan products involve advances against salary, where the loan is disbursed directly to the bank account of the borrower, but the repayment is from the corporate employer, which deducts the EMI amount from the salary. In such cases, the RBI has clarified that repayment by the corporate employer by deducting the amount from the borrower’s salary is allowed. Further, it has been clarified that Regulated Entities (REs) should ensure that LSPs do not have any control over the flow of funds directly or indirectly in such transactions. It must also be ensured that repayment is directly from the bank account of the employer to the RE.

What is missing in the FAQs

We had raised a concern on the broad data localisation mandate given under the DL Guidelines. We highlighted that 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. However, the FAQs have not addressed this concern.

If this topic is of interest to you, or you would like to share your feedback on the FAQs published by the RBI, please reach out to us by writing to garima@nasscom.in.

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Garima Prakash

Manager, Public Policy and Government Affairs

Reach out to me for all things policy about e-commerce, international trade, export controls, start-ups and fintech

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