RBI working group recommends new law to end illegal digital lending

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A working group of the Reserve Bank of India (RBI) has suggested that a separate law be enacted by the government to end illegal digital lending, while proposing stringent norms for digital lenders.

The working group was set up in the backdrop of business conduct and customer protection concerns arising out of the spurt in digital lending activities. There have been complaints of harassment by unauthorised digital lending apps. Media have reported cases of suicides by borrowers following unrelenting harassment by digital lending apps.

The working group, headed by RBI executive director Jayant Kumar Dash, proposed subjecting the digital lending apps to a verification process by a nodal agency, which should be set up in consultation with stakeholders. It also recommended setting up of a self-regulatory organisation (SRO), covering the participants in the digital lending ecosystem.

Key recommendations

• Development of certain baseline technology standards and compliance with those standards as a pre-condition for offering digital lending solutions
• Disbursement of loans directly into the bank accounts of borrowers; disbursement and servicing of loans only through bank accounts of the digital lenders
• Data collection with prior and explicit consent of borrowers with verifiable audit trails
• All data to be stored in servers located in India
• Algorithmic features used in digital lending to be documented to ensure necessary transparency
• Each digital lender to provide a key fact statement in a standardised format including the Annual Percentage Rate
• Use of unsolicited commercial communications for digital loans to be governed by a Code of Conduct to be put in place by the proposed SRO
• Maintenance of a ‘negative list’ of Lending Service Providers by the proposed SRO
• Standardised code of conduct for recovery to be framed by the proposed SRO in consultation with RBI.

“The report’s main focus is on improving client protection and ensuring the safety and soundness of the digital lending ecosystem while fostering innovation,” the RBI said in a statement.

According to a report in the Times of India, the working group has also suggested tighter norms for “buy now pay later” loans. “Since these products do not meet the requirements of traditional credit facilities, a suitable notification may be issued by the government of India in this regard,” the group said.