Digital Loan: RBI Working Group Recommends Legislation To Prevent Illegal Activities
Moneylife Digital Team 19 November 2021
A working group (WG) of the Reserve Bank of India (RBI) has recommended separate legislation to prevent illegal digital lending activities. The WG, headed by Jayant Kumar Dash, executive director (ED) of RBI, also recommended enhancing customer protection and making the digital lending ecosystem safe and sound while encouraging innovation. Meanwhile, the regulator is seeking comments from stakeholders and the public before the end of 2021.
Earlier this year, RBI had constituted the WG on digital lending including lending through online platforms and mobile apps. This group was formed in the backdrop of business conduct and customer protection concerns arising out of the spurt in digital lending activities. 
According to the report, while technological innovations have led to marked improvements, there have been unintended consequences on greater reliance on third-party lending service providers, mis-selling to unsuspecting customers, concerns over data privacy breaches and unethical business conduct illegitimate operations. 
“Mushrooming growth of technology companies extending and aiding financial services has made the regulatory role more challenging. The larger issue here is protecting the customers from widespread unethical practices and ensuring orderly growth,” the report says.
The working group says its recommendations would act at three levels: regulated entities of the RBI, other regulated or authorised entities and unregulated entities, including third-party service providers functioning in the digital financing realm.
The WG headed by Mr Ghosh also clarifies that all entities operating in the digital lending ecosystem do not come under the regulatory purview of the RBI. “For entities other than regulated entities (REs) of the RBI, concerned authorities are expected to put in place similar measures as recommended or suggested for the REs of the RBI. This would ensure holistic compliance with the recommendations and suggestions contained in this report,” it added.
The WG has highlighted 12 key areas in its recommendation, including the verification process, setting up a self-regulatory organisation (SRO), and disbursement and servicing of loans only through the digital lenders’ bank accounts among others.
Here are the key recommendations made by the working group of RBI...
1. Subjecting the digital lending apps to a verification process by a nodal agency to be set up in consultation with stakeholders.
2. Setting up a Self-Regulatory Organisation (SRO) covering the participants in the digital lending ecosystem.
3. Separate legislation to prevent illegal digital lending activities.
4. Development of certain baseline technology standards and compliance with those standards as a pre-condition for offering digital lending solutions.
5. Disbursement of loans directly into the bank accounts of borrowers; disbursement and servicing of loans only through bank accounts of the digital lenders.
6. Data collection with the prior and explicit consent of borrowers with verifiable audit trails.
7. All data is to be stored in servers located in India.
8. Algorithmic features used in digital lending to be documented to ensure necessary transparency.
9. Each digital lender to provide a key fact statement in a standardised format including the Annual Percentage Rate.
10. 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.
11. Maintenance of a ‘negative list’ of Lending Service Providers by the proposed SRO.
12. Standardised code of conduct for recovery to be framed by the proposed SRO in consultation with RBI.
The report of the WG has been placed on RBI portal for seeking comments from stakeholders and the public by 31 December 2021.
If interested, you can share your comment on the recommendation of the Working Group of RBI on Digital Lending with Moneylife Foundation. We will send all such comments to RBI. Kindly share your comments to [email protected] with the subject line "Comment on Digital Lending Report".
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