RBI Tightens Norms For Digital Lenders Amid Aggressive Recovery Practices

RBI asks digital lenders to follow fair practices code; warns banks and NBFCs with regulatory action

Inside the press room at the Reserve Bank Of India. (Photographer: Karen Dias/Bloomberg)
Inside the press room at the Reserve Bank Of India. (Photographer: Karen Dias/Bloomberg)

The Reserve Bank of India has reiterated its fair practices code for all lenders and has sought additional documentation for loan contracts signed by digital lenders. This, after reports emerged of aggressive recovery practices being used by some digital lenders and non-bank lenders amid a rise in defaults.

In a notification on Wednesday, the regulator said that it has observed instances of digital platforms portraying themselves as lenders themselves and not naming the bank or non-banking finance company backing them. The RBI also cautioned against unscrupulous practices.

“Of late, there are several complaints against the lending platforms which primarily relate to exorbitant interest rates, non-transparent methods to calculate interest, harsh recovery measures, unauthorised use of personal data and bad behavior,” the RBI said in its notification.

The regulator went on to reiterate that banks and NBFCs must adhere to Fair Practices Code in letter and spirit. The RBI also said that outsourcing a business activity does not diminish the obligations of the bank or NBFC as the regulatory compliance rests only with them.

In the spirit of regulating the processes followed by these digital lenders, the RBI laid out a set of processes that banks and NBFCs must follow.

According to the RBI:

  • Names of digital lending platforms engaged as agents shall be disclosed on the website of banks and NBFCs.
  • Digital lending platforms engaged as agents shall be directed to disclose upfront to the customer, the name of the bank or NBFC they are working with.
  • Immediately after sanction, but before disbursement, a sanction letter shall be issued to the borrower on the letter head of the bank or NBFC concerned.
  • Customers must be provided with a copy of the loan agreement at the time of sanction or disbursement of loans.
  • Banks or NBFCs must practice oversight and monitoring over digital lenders engaged by them.
  • Adequate efforts shall be made towards creation of awareness about the grievance redressal mechanism.

The additional guidelines may slowdown business for digital lenders, particularly ‘pay day lenders’, who specialise in providing small value unsecured loans for a short duration of time.

The requirement to provide a loan sanction letter on the letter head of the bank or NBFC backing the digital lender will slow down their ability to immediately disburse loan amounts into borrower accounts. Some payday lenders currently offer loans directly via their mobile applications without issuing any sanction letters immediately.

According to Anuj Kacker, co founder of MoneyTap, genuine digital lenders will not find these guidelines cumbersome to follow since they were already practicing them in letter and spirit. “Anyone who might be conducting their business in the wrong all this while, will find it difficult to comply since lenders backing them would be more careful now,” Kacker said.

Digital lenders, especially payday lenders, have gained prominence in the last few years as availability of unsecured loans has increased. Customers who are typically not covered by the banking system, such as students, self employed or temporarily unemployed borrowers, make use of these lenders to fund consumption spending.

The Covid-19 crisis has led to concerns of defaults across these loan categories, prompting aggressive recovery practices. This, in turn, has pushed the regulator into reiterating rules that govern recovery practices.

Any violation in this regard by banks and NBFCs (including NBFCs registered to operate on ‘digital-only’ or on digital and brick-mortar channels of delivery of credit) will be viewed seriously.
RBI Notification