How will digital lending guidelines protect borrowers?

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Amid rising cases of fraud and harassment, the Reserve Bank of India recently issued new digital lending policies to protect borrowers’ interests. Existing customers taking out new credit and new customers coming on board will be the beneficiaries of these policies. The deadline to comply with the new guidelines is November 30, 2022.

Let’s see how these policies protect customers.

Cooling off time available for borrowers

A cooling-off period, also known as a look-up period, is a window of time given to borrowers to exit digital loans they wish to terminate if the terms of a loan granted to them do not meet their expectations. Under RBI guidelines, a borrower can terminate their digital loan by paying principal and prorated interest without paying a penalty during the cooling off period. Prepayment is allowed if the borrower wants to continue the loan after the search period is over. It’s a customer-centric move that can be extended to offline lending as well.

Direct payment of the loan amount to the borrower’s account

The loan is paid directly from the lender/Regulated Entity (RE) account to the final beneficiary. Under no circumstances may the payment be made to a third-party account. In addition, regulated entities must ensure that the borrower carries out loan repayment and servicing directly without the involvement of a third party pool or pass-through account. This includes accounts maintained by digital lending apps or platforms and lending service providers. This move will help ensure borrowers are assured that their EMIs will be credited directly to the lender’s account.
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Upfront disclosure of loan terms and fees

Regulated entities are required to provide the borrower with a “Key Fact Statement” or KFS for transparency reasons before entering into the loan agreement. The KFS must contain all necessary credit-related information, such as B. Annual Percentage Rate (APR), clawback mechanism, complaints officer details, interest levied and disciplinary fees. During the term of the loan, the borrower cannot be charged any fees that the RE has not mentioned in the KFS. Not only does this help customers avoid hidden charges, but it also clarifies what is being paid to the lender.

All loans are to be reported to the bureaus

Credit bureaus like CIBIL and Experian have all the information about the loans and credit cards you have taken out. Every time you take out a loan or credit card, it is reported to these bureaus. Your credit score will be calculated using this information. Recently, there have been a few incidents where digitally disbursed Buy Now Pay Later loans (BNPLs) have gone unreported to the bureau. As a result, such loans were not included in the credit score calculation. For a borrower with a disciplined repayment habit, this would mean losing the benefit of a credit rating. The RBI therefore decided that all loans, regardless of their term or type, if obtained digitally, must be reported to the bureaus.
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Lending Service Providers (LSPs) cannot charge customers

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Fees or charges payable by the Regulated Entity (RE) to the Credit Service Provider (LSP) cannot be billed directly by the LSP to customers. The RE must pay the fees due directly to the LSPs. This was done to ensure that borrowers deal directly with lenders.

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List of Loan Service Providers (LSPs) is a must

All regulated lenders are required to publish the list of their Loan Service Providers (LSPs) and Digital Lending Apps (DLAs) on their websites. All LSPs and DLAs must provide a link to the websites of the lenders they are affiliated with on their websites and mobile apps for direct customer access.

Recovery officer data to be shared with borrowers

When sanctioning the loan, lenders must provide the details of authorized debt collectors who can contact the borrower to recover the loan amount. Changes to this information must be communicated to the borrower. This can help borrowers stay away from fake collection funds.

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Borrower privacy is paramount

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Regulated companies (lenders) that originate digital loans must ensure that the customer data collected by their LSPs and DLAs is only used on an as-needed basis and with the prior, explicit consent of the borrowers. On all DLA platforms of registered companies, customers must also be given the opportunity to refuse consent to the use of certain data and to limit disclosure to third parties. If necessary, the customer should have the option of deleting or forgetting the recorded data from the app. It is the responsibility of lenders to ensure that their LSPs or DLAs do not store any customer personal information other than basic information such as name, contact information and address.

The central bank’s new guidelines will significantly help borrowers against cyber financial fraud and effectively bar wrongdoing with them as long as they deal with regulated entities.

(Disclaimer: The opinions expressed in this column are those of the author. The facts and opinions expressed herein do not reflect the views of

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