FIG Paper

Pursuant to the Report of the Reserve Bank of India (“RBI”) Working Group on Digital Lending, issued on November 18, 2021, and the RBI Press Release on ‘Recommendations of the Working Group on Digital Lending – Implementation’, dated August 10, 2022 (“August Press Release”), the RBI released the Guidelines on Digital Lending on September 2, 2022 (“Guidelines”). Our Alert examines the key changes introduced and industry implications.

Analysis:

(i) The Regulated Entities, including banks and NBFCs (“REs”), are required to ensure that the Lending Services Provider (“LSP”) engaged by them and the Digital Lending App (“DLA”) (RE’s or LSP’s) comply with these Guidelines.

As ‘DLA’ and ‘LSP’ is not exhaustively defined, it is likely to raise interpretation issues qua scope, including FDI treatment for such DLAs/ LSPs.

(ii) The Guidelines apply to (a) existing customers availing fresh loans; and (b) new customers. REs have been given time till November 30, 2022, to ensure that existing digital loans are compliant with these Guidelines.

(iii) Loan Disbursal/ Servicing/ Repayment – All loan disbursements must be made into the borrower’s bank account and servicing/ repayment must be directly in the RE’s bank account, without any pass-through account/ pool account of any third party.

However, disbursals required under (i) statutory or regulatory mandate; (ii) money flow between REs for co-lending transactions; and (iii) disbursals for specific end use, directly into the beneficiary’s bank account, are exempt. Under no circumstances is disbursal to a third-party account (including that of LSPs and DLAs) permitted.

Above change may require clarity around digital lending business models, involving
payment aggregator1 tie-ups and funds processing.

(iv) Fees/ Charges/ Disclosures – Must be paid directly by REs to LSPs, and cannot be charged by the LSP to the borrower. Interest rate for digital loans must be disclosed upfront by REs. REs have to provide borrowers with key fact statement before contract execution for all digital loans, containing prescribed details.

(v) Digital Signature – Prescribed documents must be digitally signed and flow automatically to the borrowers on digital loan registration, with email/ SMS verification upon loan execution.

This has raised a debate in the industry as to whether the prescribed ‘digital signature’
requirements under the IT Act, 2000, are required to be followed.

(vi) Borrower Creditworthiness – REs are required to assess the borrower’s creditworthiness in an auditable way.

(vii) Free ‘look-in’ Period – Borrower must be given an option to exit the digital loan by paying the principal and the pro-rata interest, without any penalty, during a Board prescribed cooling-off period.

(viii) Data Restrictions – Data collection should be ‘need-based’, following basis explicit borrower consent with audit trail.

One-time access permitted for onboarding/ KYC, with explicit borrower consent. However, REs must ensure that DLAs desist from accessing mobile phone resources such as file, media, contact list, call logs, telephony functions, etc. Detailed data protection/ privacy, storage, privacy policy and technology related provisions are prescribed.

(ix) Bureau Reporting – REs are required to ensure that any lending through DLAs is reported to credit information companies.

(x) FLDG In a modification from the August Press Release, the Guidelines acknowledge the industry practice of offering FLDGs, where a third-party guarantees to compensate up to a certain % of default in the RE’s loan portfolio. However, the Guidelines ‘advise’ the REs to adhere to the Securitisation Master Directions, 2021 (“Directions”), especially the synthetic securitisation provisions in Para 6(c).

However, the above point is raising multiple industry questions:

(i) are third-party FLDGs banned;

(ii) does ‘advised’ mean mandatory or is it a recommendation?;

(iii) if mandatory, given the spirit, and the language in Annex-2, August Press Release, is compliance required only with Para 6(c), or the entire Directions, which may raise unintended consequences;

(iv) implications for NBFC to NBFC/ Bank FLDG models – would the FLDG provider NBFC be considered a ‘third party’.

Conclusion:

Given the above issues, it may be useful if the RBI issues clarificatory FAQs to avoid multiple interpretations by the industry, which includes most banks, NBFCs and many fintechs in India and globally.

The public debate and ongoing investigations around ‘digital lending’ has resulted in a fair bit of industry confusion this year and a definitive position on this issue – given the number of players affected and investments in the fintech/ tech sector in recent years, including in the digital lending space, which cuts across most fintechs/ aggregator platforms – is required.


 

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Photo of Anu Tiwari Anu Tiwari

Partner in the Corporate, M&A and Financial Institutions Advisory Practice at the Mumbai office of Cyril Amarchand Mangaldas. Anu has over 15 years of experience and advises clients on matters related to public and private M&A, raising capital, commercial agreements, and activism. Anu…

Partner in the Corporate, M&A and Financial Institutions Advisory Practice at the Mumbai office of Cyril Amarchand Mangaldas. Anu has over 15 years of experience and advises clients on matters related to public and private M&A, raising capital, commercial agreements, and activism. Anu represents both Indian and multinational fintech, banking, broker-dealer, exchange, asset management, speciality finance and information technology companies on transactional, enforcement and regulatory matters.

Anu has been a member of RBI’s Committee on Household Finance, SEBI’s Working Group on Mutual Fund Regulation, Fintech Committee of the Confederation of Indian Industries (CII) and a visiting faculty at the SP Jain School of Global Management.

Mr. Tiwari has been recognised by Chambers & Partners, IFLRMergerMarket and as Lawyer of the Year 2021, India, by Global Law Experts for his work in the M&A, Financial Regulatory and Blockchain/  Cryptocurrency space. He can be reached at anu.tiwari@cyrilshroff.com

Photo of Ketaki Mehta Ketaki Mehta

Partner in the General Corporate Practice at the Gift City and Ahmedabad office of Cyril Amarchand Mangaldas. Ketaki advises on mergers & acquisitions, joint ventures, private equity, venture capital and angel investments, lending and financing transactions and other general corporate matters across all…

Partner in the General Corporate Practice at the Gift City and Ahmedabad office of Cyril Amarchand Mangaldas. Ketaki advises on mergers & acquisitions, joint ventures, private equity, venture capital and angel investments, lending and financing transactions and other general corporate matters across all sectors and including cross border transactions. She can be reached at ketaki.mehta@cyrilshroff.com

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Partner in the Disputes Resolution practice at the Delhi office of Cyril Amarchand Mangaldas. Apart from having extensive experience in civil and commercial litigation, Pallavi is also a registered patent agent and has vast experience in intellectual property litigation. She can be reached…

Partner in the Disputes Resolution practice at the Delhi office of Cyril Amarchand Mangaldas. Apart from having extensive experience in civil and commercial litigation, Pallavi is also a registered patent agent and has vast experience in intellectual property litigation. She can be reached at pallavi.rao@cyrilshroff.com.

Photo of Utkarsh Bhatnagar Utkarsh Bhatnagar

Principal Associate in the corporate and financial regulatory practice at the Mumbai office of Cyril Amarchand Mangaldas. Utkarsh has represented various Indian and multinational fintech, information/ emerging technology companies, and also pharmaceutical, and healthcare companies on transactional, enforcement and regulatory matters. His transactional…

Principal Associate in the corporate and financial regulatory practice at the Mumbai office of Cyril Amarchand Mangaldas. Utkarsh has represented various Indian and multinational fintech, information/ emerging technology companies, and also pharmaceutical, and healthcare companies on transactional, enforcement and regulatory matters. His transactional practice focus is on public & private M&A, commercial agreements and regulatory matters. He can be reached at utkarsh.bhatnagar@cyrilshroff.com

Photo of Kush Wadehra Kush Wadehra

Senior Associate in the Corporate and Financial Regulatory practice at the Mumbai office of Cyril Amarchand Mangaldas. Kush has represented various Indian and multinational fintech, information/ emerging technology companies, on transactional, enforcement and regulatory matters. His transactional practice focus is on public &…

Senior Associate in the Corporate and Financial Regulatory practice at the Mumbai office of Cyril Amarchand Mangaldas. Kush has represented various Indian and multinational fintech, information/ emerging technology companies, on transactional, enforcement and regulatory matters. His transactional practice focus is on public & private M&A, commercial agreements and regulatory matters. He can be reached at kush.wadehra@cyrilshroff.com