Impact of digital lending guidelines on borrowing
In September 2022, the Reserve Bank of India (RBI) issued new pointers to manage digital lending actions in India. The new pointers 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 firms, 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 firms (NBFCs) could be answerable 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. Recently, the RBI governor met with choose fintech firms and conveyed that it will 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 danger via fintech firms which assist them supply clients for his or her mortgage merchandise. Typically, FLDG preparations would contain a contractual dedication by fintech firms to compensate the lenders for buyer defaults of their mortgage portfolio, in addition to granting of collateral (money, lien-marked mounted deposits, and many others.) to the lenders. The RBI isn’t misplaced in its considerations that the observe of furnishing FLDG consolation might pose systemic dangers to the ecosystem as an entire. This is as a result of lenders have been solely counting on the energy of the FLDG consolation offered by unregulated fintech firms.
However, 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 might 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 firms and digital lending platforms. Customers is also affected as lenders could rejig their mortgage product choices, which might have an effect on the mortgage measurement, tenure and pricing of such merchandise.
Fund-flow conundrums: Under the brand new digital lending pointers, the RBI has discouraged the usage of pool accounts whereas routing mortgage disbursement and compensation fund-flows. Plenty of market gamers have been counting on the companies offered 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 would 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.
However, it seems that such preparations could be prohibited going ahead as RBI has mandated that every one fund-flows have to be immediately made between the shopper and the lender. This would adversely have an effect on retail shoppers as the method and consumer expertise whereas making mortgage repayments might turn out to be cumbersome with out the involvement of fee aggregators.
The RBI has additionally restricted granting of loans into e-wallets maintained by clients. 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 of, it’s troublesome to flee the conclusion that the brand new digital lending pointers restrict the function performed by fintech firms in seamlessly facilitating the supply of digital lending merchandise to Indian shoppers. For the business to develop and thrive sooner or later, appropriate regulatory clarifications to resolve such points are crucial to retain the revolutionary digital consumer expertise which fintech firms deliver to the desk.
Prashanth Ramdas is companion and Pritish Mishra is senior affiliate at Khaitan & Co.
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