RBI Comes Up With Clarifications

Hello Reader,

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In this edition, we'll take a look at the recent FAQs released by RBI on digital lending guidelines (DLG).

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Let’s dive in!

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The Ministry of Electronics and Information Technology (MeitY) banned 94 digital lending apps including big ones like PayU's LazyPay, Kissht and more in the first week of February, 2023.

Although it allowed big players to continue their operations and their apps to become available on play stores, it raised a lot of eyebrows on the current Digital Lending Guidelines (DLG) and RBI way of doing things.

In wake of these events, RBI has released some well thought FAQs on DLG to give more clarity on the guidelines where some of my takeaways are summarized below:

1. Purview of Digital Lending: In the lending process even if there is some physical interface with the customer, as long as the majority of this process is conducted using digital technologies, it will still be classified as digital lending. Hence, it is important for lending institutions to ensure that the intent behind the guidelines is still being followed, even if it is phygital process
2. Who should be considered LSP: If the lending transaction qualifies under DLG, the service provider should be considered LSP. Credit intermediation activities like Loan origination, KYC, Repayment of Loan would qualify as lending transactions
3. Customer Support: It is mandatory to appoint a nodal Grievance Redressal Officer only for an LSP since it has an interface with borrowers while a tech service provider(TSP) to this LSP will not require any nodal grievance officer
4. Flow of funds: As per new clarifications, the flow of funds should happen directly between borrower and lender
5. The fund flow cannot be controlled directly or indirectly by any third party including the LSP, which should mean that in case of Payment aggregator (PA) or Payment gateway (PG) acting as an LSP, it can not use its PG or any of its services to let the fund flow through them
6. In case of the loans past due, lending institutions (REs) can use a physical interface to recover cash if needed. These transactions would be exempt from the requirement of direct repayment into the RE's bank account, but must be recorded in the borrower's account
7. Additionally, any fees or charges payable to Loan Service Providers (LSPs) must be paid by the RE and not charged to the borrower directly or indirectly from the recovery proceeds
8. APR: All the information including APR (annual percentage rate) and collection should be disclosed to the borrower: Borrower should be informed of APR whether it is fixed rate or floating rate and all the penalties including late charges, overdue interest should be communicated separately from APR
9. Inform customer first: In case of a delinquent loan, where the collection agency is involved for recovery, the information of the recovery agency and the agents should be communicated through email before starting the process
10. Clarity on Payment Aggregator (PA) applications: After close to a year RBI finally released the list of applicants for the PA licenses and the related status. There were 139 applicants in total - 54 existing PA's with some having restrictions, 28 new PA's but not allowed to operate yet and 57 PA's whose applications were returned/withdrawn. Below is a very high level view of the applicants:

a. The usual suspects : Cashfree, Infibeam, BillDesk, Razorpay, Airpay, PineLabs, PhonePe, Mobikwik and others

b. The unusuals : Digio, Open, CAMS, Tyke, Zomato, CRED

c. Big techs: Google, Amazon, Stripe, Adyen and others

d. Existing PA's that have re-applied and waiting for RBI: Paytm, PayU and Freecharge

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