Since the announcement of the Digital Lending guidelines in 2022, India’s lending landscape has had to make multiple pivots to stay relevant to its customers. However, thanks to cutting-edge solutions, players in the industry have been able to navigate the evolving regulatory landscape.
As 2023 draws to an end, here’s a recap of all the major touch-points the RBI has had with digital lending companies since September 2022. Let’s also delve into how RazorpayX Digital Lending 2.0 is reshaping the industry while aligning seamlessly with the regulatory changes introduced by the RBI.
Table of Contents
September 2022: Digital Lending guidelines
The Reserve Bank of India (RBI) introduced comprehensive guidelines in September 2022 to regulate the rapidly growing digital lending landscape.
Key Features of the Guidelines:
- Enhanced transparency and disclosure: Regulated Entities (REs) must provide borrowers with a Key Fact Statement (KFS) outlining essential loan information, including the Annual Percentage Rate (APR), fees, and cooling-off period.
- Stricter data privacy: Borrowers have explicit control over their data, with the ability to grant/deny consent, restrict disclosure, and request data deletion. LSPs are prohibited from accessing sensitive mobile phone resources.
- Fair lending practices: Penal interest must be based on outstanding amounts and disclosed upfront. Automatic credit limit increases are prohibited without borrower consent.
- Standardized grievance redressal: REs must appoint nodal officers for FinTech/digital lending complaints, with escalation options through the RB-IOS portal.
- Technology and security: REs and LSPs need to comply with cybersecurity standards and store all data within India.
- Direct fund flow: The RBI mandated that all disbursals and repayments will flow directly between the lender and borrower’s accounts, without any pass-throughs.
Implications for Lending Businesses:
- Increased compliance costs: Businesses need to invest in technology and resources to comply with the new data privacy and security requirements.
- Greater transparency: Borrowers are now more informed about loan terms and conditions, potentially leading to increased competition and downward pressure on interest rates.
- Improved consumer protection: The guidelines promote responsible lending practices, reducing the risk of borrower exploitation and unfair fees.
RazorpayX swiftly responded by launching its Digital Lending 2.0 suite. This full-stack lending solution is designed to empower NBFCs and Fintech partners, ensuring compliance with the new regulations.
RazorpayX Digital Lending 2.0 Highlights:
- Automated 10-second disbursals & collections
- Manage multiple Fintechs with just one current account – with the same level of efficiency!
- Avoid money leakages by adding balance limits for each Fintech and setting amount-based approvals. Duplicate loan transfers will be caught automatically.
- Seamless reconciliation of millions of transactions, providing real-time insights into transaction status.
Here’s how we solved the challenge of no pass-through accounts:
– 100:0 model businesses: Fintechs trigger a disbursal request. The partner NBFC then disburses and collects the funds via a Current Account opened in their name.
– Co-lending model businesses: Fintechs work with multiple NBFCs in a co-lending set up. Disbursals & repayments are managed directly via the Escrow+ account. This eliminates the need for a third party/pool account.
February 2023: RBI’s FAQs on Digital Lending Guidelines:
In February 2023, the RBI published a set of FAQs to further help stakeholders understand the nature of the guidelines announcement. Here are the key points of these FAQs:
- Definition of digital lending: Applies even if some physical interaction is present, as long as it’s primarily digital.
- Lending service provider (LSP): Only applies to those facilitating digital lending transactions.
- Grievance redressal: Only LSPs with borrower interface need a nodal officer.
- Credit card EMI programs: Not covered by Digital Lending Guidelines.
- APR for floating rate loans: Disclosed based on the prevailing rate at origination, with revised rates communicated via SMS/email.
- Insurance charges: Included in APR only if linked/integrated with the loan product.
- Fund flow control: No third party, including LSPs, can directly or indirectly control loan disbursal and repayment.
- Payment aggregators (PA): Can be used for disbursal and repayment unless they function as LSPs.
- Delinquent loans: Cash recovery allowed but any fees should be paid directly by REs.
- Co-lending: Exemption granted for disbursal between REs, but no third-party control over funds.
- Corporate loans: Guidelines apply to all transactions meeting the definition of Digital Lending.
- Mobile banking apps: Guidelines apply if personal loans or loans against deposits are offered like DLAs.
- Penal interest: Based on outstanding amount, but can be levied on a lower base.
- Per-instance charges: Need not be annualized but disclosed separately as ‘Contingent Charges’ in KFS.
- Processing fees: Reasonable one-time fee can be retained for exits during cooling-off period and included in APR.
- Recovery agents: Details of empaneled agents may be conveyed at sanction, but details of assigned agent must be communicated before contact.
- APR and annualized interest rate: Both need to be disclosed to borrowers.
June 2023: RBI’s Guidelines on Default Loss Guarantee (DLG) in Digital Lending
The Default Loss Guarantee guidelines regulate agreements where a fintech or another bank (DLG provider) guarantees to compensate a lending institution (RE, like a bank or NBFC) for a portion of loan losses in case of borrower defaults.
Key features of the announcement:
- Introduction of DLG: Enables REs to obtain guarantees from lending service providers (LSPs) or other regulated entities against loan portfolio defaults.
- Limited Coverage: DLG can only cover up to 5% of the loan portfolio and must be backed by specific collateral (cash, fixed deposits, bank guarantees).
- Strict Invocation: DLG claims must be made within 120 days of default.
- Long-Term Commitment: DLG agreements must last at least as long as the longest loan in the portfolio.
- Transparency Requirements: LSPs providing DLG must publicly disclose relevant information.
- Due Diligence: Regulated entities need robust internal policies for choosing DLG providers.
- Focus on Credit Risk Management: DLG is not a substitute for sound credit assessments and risk management by lending businesses.
Implications for Lending Businesses
- The DLG guidelines introduce a new risk-sharing mechanism in digital lending, offering potential benefits but also imposing regulatory limitations.
- Increased access to DLG could facilitate easier loan approvals and expand credit penetration, particularly for underserved segments.
- DLG may enhance risk management, potentially leading to lower provisioning requirements and improved capital efficiency.
September 2023: RBI Governor urges fintechs to have SROs
In September 2023, the Reserve Bank of India (RBI) Governor, Shaktikanta Das, urged fintech companies to establish a self-regulatory organization (SRO) for the orderly growth of the industry.
- Ethical Business Practices: Importance of promoting ethical business practices, transparency in pricing, and preventing misselling.
- Good Governance: Emphasizes the importance of good governance for long-term success of fintech companies.
- Frictionless Credit Platform: RBI considering handing over the platform to a private company, similar to NPCI.
- Open Architecture: Platform aims to be open-source, allowing banks and NBFCs to onboard.
October 2023: RBI raises risk rates
The Reserve Bank of India (RBI) recently increased the risk weight of certain loans, effective November 16, 2023. This affects both scheduled commercial banks (SCBs) and non-banking financial companies (NBFCs).
Key features of the announcement:
- Unsecured loans (excluding housing, education, vehicle, and gold loans): Risk weight increased from 100% to 125% for SCBs and NBFCs. This includes categories like credit cards, consumer durable loans, and personal loans.
- Credit card loans: For SCBs, the risk weight increased from 125% to 150%. NBFCs remain at 125%.
Implications for Lending Businesses
- Loans to get more expensive: A higher risk weight essentially means that banks and NBFCs need to hold more capital as reserves against these loans.
- Higher interest rates on unsecured loans: Banks and NBFCs may pass on the increased cost to borrowers in the form of higher interest rates.
- Slower growth in unsecured lending: The increased capital requirement might incentivize lenders to be more cautious when issuing unsecured loans, potentially curbing the growth of this segment.
- Improved financial stability: The additional capital requirement strengthens the financial system by making banks and NBFCs more resilient to potential loan defaults.
Why Digital Lending Companies Love RazorpayX
Beyond being an industry-best digital lending stack, RazorpayX Digital Lending 2.0 introduces novel possibilities to meet the needs of booming customer segments and establishs a sturdy digital lending framework.
- Fully digitalized acquisition channel: Streamlining customer acquisition for the fastest-growing businesses in the country.
- Credit fulfillment & evaluation: Ensuring an almost instant and enhanced access to credit.
- Support for lifecycle management and collections Delivering value throughout the product usage lifecycle and offering adept support for repayment services.
- Speed of getting started: You can go live in less than a week in just three steps!
Leading digital lending companies, including Credit Saison, Lendbox, Liquiloans, Smart Coin, and many others, have switched to RazorpayX Digital Lending 2.0 to enhance their digital lending capabilities.