Key compliances for Regulated Entities under the RBI Guidelines on Digital Lending

It has been reiterated that outsourcing arrangements entered by Regulated Entities (REs) with a Lending Service Provider (LSP)/ Digital Lending App (DLA) does not diminish the REs’ obligations and they shall continue to conform to the existing guidelines on outsourcing.

The REs are advised to ensure that the LSPs engaged by them and the DLAs (either of the RE or of the LSP engaged by the RE) comply with these guidelines.

Key Compliance Obligations:

1. Loan Disbursal, Servicing and Repayment:

• REs have to ensure that all loan servicing, repayment, etc., is be executed by the borrower directly in the RE’s bank account without any pass-through account/ pool account of any third party.
• The disbursements should always be made into the bank account of the borrower except for disbursals covered exclusively under statutory or regulatory mandate (of RBI or of any other regulator), flow of money between REs for co-lending transactions and disbursals for specific end use, provided the loan is disbursed directly into the bank account of the end-beneficiary.
• REs should ensure that in no case, disbursal is made to a third-party account, including the accounts of LSPs and their DLAs, except as provided for in these guidelines.

2. Collection of fees, charges, etc:

• REs should ensure that any fees, charges, etc., payable to LSPs are paid directly by them (REs) and are not charged by LSP to the borrower directly.
• The penal interest/charges levied, if any, on the borrowers must be based on the outstanding amount of the loan. Further, rate of such penal charges shall be disclosed upfront on an annualized basis to the borrower in the Key Fact Statement (KFS).

3. Disclosures to borrowers:

• APR as all-inclusive cost of digital loans for the borrower must be disclosed upfront by REs and REs should ensure that this also forms a part of the Key Fact Statement.

4. Key Fact Statement:

• REs must provide a Key Facts Statement (“KFS”) document to the borrower before the execution of the contract in a standardized format for all digital lending products.
• The KFS must, apart from other necessary information, contain the details of APR, the recovery mechanism, details of grievance redressal officer designated specifically to deal with digital lending/ FinTech related matter and the cooling-off/ look-up period.

5. Digitally signed documents:

• REs have to ensure that digitally signed documents (on the letter head of the RE) viz., KFS, summary of loan product, sanction letter, terms and conditions, account statements, privacy policies of the LSPs/DLAs with respect to borrowers data, etc. automatically flow to the borrowers on their registered and verified email/ SMS upon execution of the loan contract/ transactions

6. List of LSP:

• REs must prominently publish on their website list of their DLAs, LSPs engaged by them and DLAs of such LSPs with the details of the activities for which they have been engaged.

7. Product Information:

• REs must ensure that their DLAs or DLAs of their LSPs at on-boarding/sign-up stage, prominently display information relating to the product features, loan limit and cost, etc., so as to make the borrowers aware of these aspects.

8. Details of recovery agent:

• REs should communicate to the borrowers at the time of sanctioning of the loan and also at the time of passing on the recovery responsibilities to an LSP or change in the LSP responsible for recovery, the details of the LSP acting as recovery agent who is authorised to approach the borrower for recovery.

9. Link to website:

• REs should ensure that DLAs of REs and LSPs have links to REs’ website where further/ detailed information about the loan products, the lender, the LSP, particulars of customer care, link to Sachet Portal, privacy policies, etc. can be accessed by the borrowers.
• Further, they should also ensure that all such details are available at a prominent single place on the website for ease of accessibility.

10. Implementation of Grievance Redressal Mechanism:

• Nodal grievance redressal officer – REs should ensure that ensure that they and the LSPs engaged by them have a suitable nodal grievance redressal officer to deal with FinTech/ digital lending related complaints/ issues raised by the borrowers. Such grievance redressal officer should also deal with complaints against their respective DLAs. Contact details of grievance redressal officers should be prominently displayed on the websites of the RE, its LSPs and on DLAs and also in the KFS provided to the borrower. Further, the facility of lodging complaint should also be made available on the DLA and on the website as stated above. It is reiterated that responsibility of grievance redressal shall continue to remain with the RE.
• If any complaint lodged by the borrower against RE or the LSP engaged by the RE is not resolved by the RE within the stipulated period (currently 30 days), he/she can lodge a complaint over the Complaint Management System (CMS) portal under the Reserve Bank-Integrated Ombudsman Scheme (RB-IOS)5. For entities currently not covered under RB-IOS, complaint may be lodged as per the grievance redressal mechanism prescribed by the Reserve Bank

11. Assessing the borrower’s creditworthiness:

• REs should ensure that they capture the economic profile of the borrowers covering (age, occupation, income, etc.), before extending any loan over their own DLAs and/or through LSPs engaged by them, with a view to assessing the borrower’s creditworthiness in an auditable way.
• REs should ensure that there is no automatic increase in credit limit unless explicit consent of borrower is taken on record for each such increase.

12. Cooling off/look-up period:

• REs should ensure that the borrower is given an explicit option to exit digital loan by paying the principal and the proportionate APR without any penalty during this period. The cooling off period should be determined by the Board of the RE.
• REs have to ensure that the period so determined is not be less than 3 days for loans having tenor of seven days or more and one day for loans having tenor of less than seven days. For borrowers continuing with the loan even after look-up period, pre-payment shall continue to be allowed as per extant RBI guidelines

13. Due diligence and other requirements with respect to LSPs:

• REs must conduct enhanced due diligence before entering into a partnership with a LSP for digital lending, taking into account its technical abilities, data privacy policies and storage systems, fairness in conduct with borrowers and ability to comply with regulations and statutes
• REs must carry out periodic review of the conduct of the LSPs engaged by them.
• REs must impart necessary guidance to LSPs acting as recovery agents to discharge their duties responsibly and ensure that they comply with the extant instructions in this regard.

14. The provisions with respect to Technology and Data Requirement, such as:

• Collection, usage and sharing of data with third parties
• Storage of data
• Comprehensive privacy policy
• Technology standards

15. 15. Other provisions regarding Regulatory Framework:

• REs shall ensure that any lending done through their DLAs and/or DLAs of LSPs is reported to Credit Information Companies (CICs) irrespective of its nature/ tenor. Any extension of structured digital lending products by REs and/or LSPs engaged by REs over a merchant platform involving short term, unsecured/ secured credits or deferred payments, need to be reported to CICs by the REs. REs shall also ensure that LSPs, if any, associated with such deferred payment credit products shall abide by the extant outsourcing guidelines issued by the Reserve Bank and be guided by these guidelines.
• For offering financial products involving contractual agreements such as First Loss Default Guarantee (FLDG) in which a third party guarantees to compensate up to a certain percentage of default in a loan portfolio of the RE, the REs shall adhere to the provisions of the Master Direction – Reserve Bank of India (Securitisation of Standard Assets) Directions, 2021 dated September 24, 2021, especially, synthetic securitisation contained in Para (6)(c).

Please refer to the hyperlink provided below for a detailed read of the Guidelines.

Source: Reserve Bank of India