RBI releases New Digital Lending guidelines

The Reserve Bank of India (RBI), on August 10, 2022, released the new Digital Lending guidelines (available at- link). Digital Lending (as defined by RBI) is ‘a remote and automated lending process, used for seamless digital technologies in customer acquisition, credit assessment, loan approval, disbursement, recovery and associated customer service’.
Given the sensitive nature of the lending business and to address certain concerns of the consumers, the RBI constituted a “Working Group on Digital Lending” (WGDL) in January 2021. The WGDL released its report and invited comments for putting in place a regulatory framework to govern the fast-growing arena of digital lending. Subsequently, new digital guidelines were introduced with the dual objective of growing financial systems and institutions as well as at the same time ensuring consumer protection.
It is to be noted that the regulatory framework proposed by the WGDL and released by the RBI govern only entities regulated by the RBI and Lending Service Providers (LSP’s) engaged by them. All other lending entities (such as entities authorized to carry out lending service under other statutory provision; and entities not governed or authorized by any statutory body or regulation) fall outside the ambit of these guidelines. For such entities, the WGDL has recommended constituting a framework to prevent illegitimate lending businesses and to protect the interests of the public.
Interestingly, according to the new guidelines, increasing credit limits automatically, without explicit consent from the borrower would be prohibited. Further, a mandatory cooling- off period is to be made part of all loan contracts, in order to permit borrowers to exit digital loans without a penalty. Additionally, the new guidelines strictly provide that all repayments and loan disbursals would be completed only between the borrower and the regulated entity (for digital lending) without the interference of third-parties.
In terms of technology and data protection requirement, the guidelines provide that Digital Lending Apps shall only collect data on a need-base requirement and all data shall be collected after obtaining explicit consent of the customer/borrower.
By eradicating the role of middlemen (third parties) in transactions between the borrower and the regulated entity, these guidelines are anticipated to achieve a high level of consumer protection. The emphasis on the protection of data of the users as well as the requirement of deployment of security measures further attempts to grow consumer interest towards digital lending and borrowing.