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August 11, 2022

Indian central bank tightens grip on digital lending

The Reserve Bank of India (RBI) has issued new norms to increase scrutiny of the digital lending space and to enhance consumer protection against malpractice. 

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Announcing the new norms, the RBI noted that the concerns “primarily relate to unbridled engagement of third parties, mis-selling, breach of data privacy, unfair business conduct, charging of exorbitant interest rates, and unethical recovery practices.”

The new norms dictate that only the entities regulated by the RBI will be allowed to disburse loans and collect repayments without any third party.

Regulated entities will be required to pay any fees/charges to lending service providers during the credit intermediation process, the central bank said. 

In January this year, RBI constituted a Working Group (WG) on ‘digital lending including lending through online platforms and mobile apps’ and the updated norms are based on WG’s recommendations. 

Additionally, customers must be providers with a standardised Key Fact Statement (KFS) before the loan contract is executed and lenders must disclose the all-inclusive cost of digital loans in the form of an Annual Percentage Rate (APR). 

The central bank has also barred lenders from increasing the credit limit without customers’ consent. 

Among several others, the new rules are also aimed at addressing data-related concerns. 

The RBI has said that the data collected by digital lending apps (DLAs) should be need-based. It should have clear audit trails and should be only done after receipt of explicit consent from the borrower. 

The regulator further said irrespective of the nature or duration of the loan, lending activities conducted by DLAs must be reported to Credit Information Companies (CICs) by regulated entities. 

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