In September 2022, the Reserve Financial institution of India (RBI) issued new tips to control digital lending actions in India. The brand new tips launched numerous adjustments together with imposing restrictions on current mortgage disbursement and compensation fund-flows, prohibiting grant of credit score on e-wallets, regulating assortment of charges by lending apps, mandating obligatory reporting of all digital loans to the credit score bureaus, regulating assortment and utilization of buyer knowledge by fintech corporations, and curbing first loss default assure (FLDG) preparations.

As a watchdog for the lending ecosystem in India, the RBI emphasised on the necessity for digital lenders to make sure full transparency whereas providing merchandise via digital platforms. Banks and non-banking finance corporations (NBFCs) could be liable for all regulatory compliances (together with these associated to buyer safety and product transparency), no matter the involvement of third events within the credit score facilitation course of. Just lately, the RBI governor met with choose fintech corporations and conveyed that it could proceed to undertake a participative and consultative method for facilitating innovation within the monetary companies sector.

FLDG preparations: FLDG entails regulated lenders corresponding to banks and NBFCs hedging their credit score threat via fintech corporations which assist them supply prospects for his or her mortgage merchandise. Usually, FLDG preparations would contain a contractual dedication by fintech corporations to compensate the lenders for buyer defaults of their mortgage portfolio, in addition to granting of collateral (money, lien-marked fastened deposits, and many others.) to the lenders. The RBI will not be misplaced in its issues that the follow of furnishing FLDG consolation may pose systemic dangers to the ecosystem as a complete. It’s because lenders had been solely counting on the power of the FLDG consolation supplied by unregulated fintech corporations.

Nonetheless, the impression of proscribing FLDG preparations out there are far reaching and deserves a regulatory relook. A blanket restriction on FLDG preparations with out viable alternate options may derail the expansion of digital lending and India’s monetary inclusion efforts, and not directly improve the price of borrowings for shoppers. This might additionally negatively impression the seamless sourcing of debtors by regulated lenders via fintech corporations and digital lending platforms. Clients is also affected as lenders could rejig their mortgage product choices, which may have an effect on the mortgage measurement, tenure and pricing of such merchandise.

Fund-flow conundrums: Below the brand new digital lending tips, the RBI has discouraged the usage of pool accounts whereas routing mortgage disbursement and compensation fund-flows. A number of market gamers had been counting on the companies supplied by intermediaries, corresponding to fee aggregators, within the fund-flow course of. For instance, when a buyer has to repay a mortgage availed via a digital lending platform, the platform would combine with a fee aggregator to supply numerous digital fee strategies for the shopper to make the mortgage compensation. This might necessitate the compensation fund-flows being routed via such fee aggregator, which might pool the funds in its escrow account and settle them with the lenders.

Nonetheless, it seems that such preparations could be prohibited going ahead as RBI has mandated that each one fund-flows have to be straight made between the shopper and the lender. This might adversely have an effect on retail shoppers as the method and person expertise whereas making mortgage repayments may grow to be cumbersome with out the involvement of fee aggregators.

The RBI has additionally restricted granting of loans into e-wallets maintained by prospects. This has affected numerous shoppers who had availed customised merchandise supplied by digital lenders based mostly on particular use-cases (which concerned utilization of their pay as you go wallets or playing cards to make retail purchases via versatile credit score choices).

All issues thought-about, it’s troublesome to flee the conclusion that the brand new digital lending tips restrict the position performed by fintech corporations in seamlessly facilitating the supply of digital lending merchandise to Indian shoppers. For the trade to develop and thrive sooner or later, appropriate regulatory clarifications to resolve such points are crucial to retain the modern digital person expertise which fintech corporations deliver to the desk.

Prashanth Ramdas is accomplice and Pritish Mishra is senior affiliate at Khaitan & Co.

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