The LexGaze Weekly - DECIPHER

Fintech lending in India and the recent RBI guidelines

Prakhar Srivastava

Issue 10 | August 23, 2020

Background


Fintech continues to be the buzzword in financial markets across the world and India is no exception. One of the areas Fintech is making rapid strides into is “lending”. Obtaining a loan from a traditional bank in India has never been easy, more so for the weakest stratum of the economy. Consequently, the poor and the marginalized rely tremendously on the unorganized sector for borrowing, which primarily includes community finance such as family, community members and unregulated private lenders. The segment was ripe for disruption through technology, and Fintech did that.


Fintech in lending


Numerous fintech startups in India in the recent past have entered into the realm of lending. These startups offer instant loans and the rate of interest charged by them as well as the tenure durations are as good as traditional banks, and much better than the unorganized sector. What’s more, the process for applying for such loans is also very simple and is much quicker, when compared to a traditional bank. The ever increasing internet penetration, use of smart mobile phones and the sheer simplicity of online apps offering loans make them a viable option for the masses.


Some common examples of fintechs offering loans are Money Tap; Capital Float; Mobikwik; Shubhloans; Lendingkart; Indialends; etc.


Problems


Very recently, a large number of complaints of deployment of coercive loan recovery measures by some fintechs came to light. Not just that, it was also widely reported that fintechs were charging exorbitant rates of interest for loans during the pandemic. This raised some serious questions pertaining to the efficacy of fintechs entering into the domain of lending.


Moreover, Fintech apps for lending that we download on our phones typically have a tie-up with a bank or an NBFC, from where they source funds for onward lending; but borrowers complain that they hardly get to know the bank or the NBFC their fintech app is associated with. Consequently, it becomes next to impossible for users to register their grievances about unfair practices being used by the fintech concerned.


Furthermore, sanction letters and loan agreements are generally hidden in apps very difficult to locate for the users. In fact, some lending apps simply do not have the links to download them.


RBI Guidelines


In view of the aforementioned problems, the Reserve Bank of India (“RBI”) vide a notification dated June 24, 2020 (RBI/2019-20/258), directed digital lending platforms to disclose all relevant information on their websites. The notification extends to banks and Non-Banking Finance Companies (“NBFC”) as well.

Here’s the notification broken down for you:


- The notification provides that banks and NBFCs have to disclose the names of digital lenders or fintechs that they have engaged on their websites. Likewise, digital lenders too have to inform their customers upfront about the names of banks/ NBFCs on whose behalf they are disbursing loans.


- The notification provides that the sanction letter be issued to the borrower on the letterhead of the bank / NBFC concerned while applying for the loan. Also, a copy of the loan agreement shall be furnished to all borrowers at the time of sanction/ disbursement of loans.


- Effective oversight and monitoring shall be ensured over the digital lending platforms engaged by the banks/ NBFCs.


- Adequate efforts shall be made towards creation of awareness about the grievance redressal mechanism.

With the aforesaid measures, digital lending becomes more transparent and borrowers now have the option of approaching the right authorities, especially against use of coercive methods for loan repayment and other unfair practices.

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