RBI tightens norms for digital lending in a bid to protect consumers! - Click here to know the changes!

RBI tightens norms for digital lenders.

RBI tightens norms for digital lending

The RBI has issued new guidelines against digital lenders to limit unfair trade practices. Digital lenders are facing several complaints regarding very high-interest rates, fraud, breach of data privacy norms and aggressive recovery practices. In a bid to reduce the unfair trade practices and lighten the burden on the consumers, the RBI has issued fresh guidelines. 

The new norms which are applicable to RBI-regulated digital lenders and service providers mandate the digital lenders to disclose the all inclusive costs of loans to the borrowers. Also, without the borrower’s consent, the digital lenders cannot increase the credit limit for their customers. 

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New norms as per RBI

The RBI set up a committee in January 2021 to regulate the digital lending entities. The lending is permitted only via entities regulated by the central bank. The guidelines enforce that all the loan payments should be made in the accounts of the lender directly. Third parties cannot receive the loan EMI payments. Also, the fees should be paid directly by the lending entity and not by the borrower.

The new norms mandate a cooling period in which the borrower can make the payments of principal and interest without any penalty. Also, each lending entity should have a nodal officer to listen to the complaints of the borrowers.

As per the digital lenders, the RBI guidelines are fair and will not hinder their progress. As per the entities, this will not limit the innovation and is a mere compliance requirement to protect the borrowers. This will hinder the fake apps and the unfair practices of a few unregulated entities. The regulated entities will comply with the requirements and become stronger lenders.

Apart from these guidelines, the RBI has also mandated the disclosure of all fees like the interest rates, origination charges, processing fees, discount points, etc. An automatic increase in credit limit is prohibited as well. The digital lenders should also disclose all their transactions to the credit bureaus for an effective rating of the borrower.

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Further deliberations

Some RBI norms have been accepted, whereas some guidelines are under further deliberations as well. The recommendations on the first loss default guarantee (FLDG) are under examination by RBI. Also, third-party guarantees regarding loan losses will be as per the guidelines laid down in the Master Directions of Securitisation of Standard Assets 2021.

The RBI has also suggested that the government ban unregulated entities. This will ensure transparency for all the borrowers if the government acts on the directions of the RBI. The RBI also wants the setting up of an independent body like the Digital India Trust Agency. The RBI has also recommended setting up a national financial crime records bureau with a data registry to record all the crimes in digital lending. It will be like the National Crime Records Bureau.

All these suggestions are under further deliberation and might take years to come into practice. These steps look in the right direction to regulate digital lenders and protect the borrowers against any unfair practices. This should ensure healthy competition amongst the digital lenders.

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RBI Issues Digital Lending Norms to control Frauds, Unlawful Activities 

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