The digital lending landscape in India has sharply risen, especially during the COVID-19 pandemic. Banks and NBFCs are increasingly lending either directly through their own digital platforms or through a digital lending platform under an outsourcing arrangement. Such outsourcing arrangements are generally entered into with Lending Service Providers (LSP)/ Digital lending Applications (DLAs).

With the expansion of digital lending, various concerns have also emerged. These primarily relate to the unbridled engagement of third parties (or LSPs), mis-selling, breach of data privacy, unfair business conduct, exorbitant interest rates, and unethical recovery practices. While the current share of digital lending in the overall credit of the financial sector is not significant to affect financial stability, its growth momentum has compelling stability implications.

With a view to strike a balance between the need for an innovative and inclusive system of lending (i.e. digital lending) while at the same time protecting the customer’s interest, the Reserve Bank of India (RBI) has undertaken various measures.

New Development

On 2 September 2022, RBI issued the guidelines on digital lending (the guidelines), which are applicable to all Regulated Entities (REs). The REs would also need to ensure that the LSPs engaged by them, and the digital lending apps of the REs and of the LSPs engaged by the REs comply with the guidelines.

Effective date : The effective date from which the guidelines are applicable is given below:

  • New Loans : The guidelines are applicable on an immediate basis (i.e. from 2 September 2022) to the existing customers availing fresh loans and to new customers getting onboarded.
  • Existing Loans : REs would be given time till 30 November 2022 to put in place adequate systems and processes to ensure that existing digital loans comply with the guidelines.

In this issue of the First Notes, we aim to provide an overview of the digital lending lifecycle and the guidelines issued by RBI.