digital loans: Borrowers must be allowed to exit digital loans sans penalty in initial look-up period: RBI

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The Reserve Bank of India (RBI) recently issued regulatory framework to ensure orderly growth of credit delivery through digital lending entities. The framework was firmed up based on the inputs received from the working group on “Digital Lending including Lending through Online Platforms and Mobile Apps” (WGDL).

The framework is based on the belief that only organisations that are either governed by the central bank or are legally authorised to do so may engage in lending activities.

“The Reserve Bank has encouraged innovation in the financial system, products and credit delivery methods while ensuring their orderly growth, preserving financing stability and ensuring protection of depositors’ and customers’ interest. Recently, innovative methods of designing and delivery of credit products and their servicing through Digital Lending2 route have acquired prominence. However, certain concerns have also emerged which, if not mitigated, may erode the confidence of members of public in the digital lending ecosystem.

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,” stated the RBI notification issued on August 10, 2022.

The following are the requirements that digital lending institutions are required to adhere to with regards to customer protection and conduct issues as per the RBI notification.

1. All loan disbursals and repayments are required to be executed only between the bank accounts of borrower and the RE without any pass-through/ pool account of the LSP or any third party.
2. Any fees, charges, etc., payable to LSPs in the credit intermediation process shall be paid directly by RE and not by the borrower.
3. A standardized Key Fact Statement (KFS) must be provided to the borrower before executing the loan contract.
4. All-inclusive cost of digital loans in the form of Annual Percentage Rate (APR)6 is required to be disclosed to the borrowers. APR shall also form part of KFS.
5. Automatic increase in credit limit without explicit consent of borrower is prohibited.
6. A cooling-off/ look-up period during which the borrowers can exit digital loans by paying the principal and the proportionate APR without any penalty shall be provided as part of the loan contract.
7. REs shall ensure that they and the LSPs engaged by them shall have a suitable nodal grievance redressal officer to deal with FinTech/ digital lending related complaints. Such grievance redressal officer shall also deal with complaints against their respective DLAs. The details of the Grievance redressal officer shall be prominently indicated on the website of the RE, its LSPs and on DLAs, as applicable.
8. As per extant RBI guidelines, if any complaint lodged by the borrower is not resolved by the RE within the stipulated period (currently 30 days), he/she can lodge a complaint under the Reserve Bank – Int

egrated Ombudsman Scheme (RB-IOS).



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