The Reserve Bank of India (the "RBI") recently issued a notification1 (the "Notification") to reiterate and ensure compliance of the Fair Practices Code and outsourcing guidelines for financial services, in letter and spirit, by banks and non–banking financial companies ("NBFCs") providing loans through digital lending platforms.
This Notification comes in the backdrop of the emerging developments in the financial sector in India, with banks and NBFCs lending to customers such as retail individuals, small traders and other borrowers, both, directly through their own digital platforms as well as under outsourcing arrangements with third party digital lending platforms.
PROVISIONS OF THE NOTIFICATION
The Notification, which seeks to address the non-transparency and violation of extant guidelines on the outsourcing of financial services issued to banks and NBFCs, comes in response to certain observations2 regarding non-disclosure by online lending platforms of the names of actual lending banks/NBFCs, exorbitant interest rates being charged to borrowers, non-transparent methods to calculate interest, harsh recovery practices, and unauthorised use of personal data in respect of transactions pertaining to digital delivery in credit intermediation.
Accordingly, the RBI has issued the following instructions through the Notification, to reiterate its guidelines and norms for banks and NBFCs engaging digital lending platforms as their agents to source borrowers and/or to recover dues:
- Names of digital lending platforms engaged as agents must be disclosed on the website of banks and NBFCs.
- Digital lending platforms engaged as agents must be directed to disclose upfront to the customer, the name of the bank and/or NBFCs on whose behalf they are interacting with the customer.
- Sanction letter must be issued to borrower on the letter head of the concerned bank and/or NBFCs, immediately after sanction of loan and prior to execution of loan agreement. Further, a copy of loan agreement, along with all enclosures quoted therein must be furnished to all borrowers at the time of sanction/disbursement of loans.
- Banks and NBFCs must ensure effective oversight and monitoring over the digital lending platforms engaged by them and adequate efforts must be made towards creation of awareness about the grievance redressal mechanism.
The RBI has specifically provided that any violation in this regard by banks and NBFCs, including NBFCs registered to operate on 'digital-only' channels as well NBFCs registered to operate on both digital and brick-mortar channels, will be viewed strictly.
INDUS LAW VIEW
With the proliferation of digital lending platforms in India, the RBI through the Notification, has re-emphasized on the ultimate responsibility of banks and NBFCs with respect to compliance of regulatory instructions in outsourcing of activities, including over digital lending platforms.
By re-vesting the ultimate responsibility of regulatory compliance by such lending platforms on banks and NBFCs, the Notification is expected to bring about increased transparency with regard to credit intermediation and induce banks and NBFCs to more actively mandate their digital lending partners to comply with the extant regulatory framework. This move will prompt digital lending platforms who are presently not in compliance with the extant regulatory framework, to make operational and strategic changes.
Changes to the user-interface on websites and mobile applications of digital lenders can be expected, for a more prominent display of terms and conditions (including applicable broad-based interest rates) to potential borrowers before sanctioning of loans, which may otherwise go unnoticed in the fine print. Digital lending platforms that provide immediate disbursement of loans to borrowers' accounts (for instance, unsecured, shorter-duration and small-ticket loans), will need to overcome operational challenges with additional documentation norms as prescribed under the Notification. Changes to the grievance redressal mechanism vis-à-vis banks, NBFCs and digital lending platforms, to make them more robust and effective for borrowers, are also likely to be implemented.
1. 'Loans Sourced by Banks and NBFCs over Digital Lending Platforms: Adherence to Fair Practices Code and Outsourcing Guidelines' dated June 24, 2020 available at https://www.rbi.org.in/scripts/NotificationUser.aspx?Id=11920&Mode=0.
2. A news report indicates that several customers have complained on social media platforms about intimidation and harassment by collection agents of digital lending platforms, including naming and shaming, fake legal notices and repeated 'harassment' calls. News Report available at https://tech.economictimes.indiatimes.com/news/internet/loans-apps-turn-nightmare-for-borrowers/76166706.
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