The Digital Lending Standards announced by the Reserve Bank of India (RBI) on August 10, 2022 aim to usher in orderly growth and financial stability, control abusive practices, enhance transparency, and protect the interests of customers. They would, however, increase operational intensity and compliance costs for short-term lenders, rating agency CRISIL said on Friday.
Indeed, digital lenders have built their entire customer journey through technological means, including credit underwriting using alternative data sources and artificial intelligence, he added.
Some of the rules that come into force with immediate effect will have a major impact on how non-bank financial companies (NBFCs) operate in this space.
According to Krishnan Sitaraman, Senior Director and Deputy Director of Ratings, CRISIL Ratings, “Regulations on the direct transfer of disbursements/refunds between borrowers and lenders will impact buy now, pay later services and prepaid instruments. offered. Business models will need to be changed to comply with new regulations.”
“Another significant change is the restriction on cleaning/reading borrowers’ smartphones. This was a typical part of the digital consumer loan underwriting regime, and will need to be revamped now,” he said. added.
While overall the revised standards are expected to improve levels of corporate governance, transparency and disclosure, clarifications on the use of first-to-default guarantees, which are still under further scrutiny , are worth monitoring. This aspect is an important feature of the business models of some of today’s digital lenders.
The new regulatory framework – centered on the digital lending ecosystem of Regulated Entities (REs) and Lending Service Providers (LSPs) engaged by them to extend various authorized credit facilitation services – stipulates that all disbursements and repayments of Loans must flow strictly between the bank accounts of the borrower and the lender, without any repercussion on the account of the LSP or third parties.
In order to guarantee the data protection and the private life of the borrowers, it imposes as a condition that the collection of the data is based on the needs and involves the prior consent of the borrower. In any case, it does not allow access to mobile phone resources such as contact lists, files or documents.
It also specifies that a standardized Key Facts Statement (KFS) must be provided to the borrower. Fees not mentioned in the KFS cannot be charged.
In addition, all-inclusive costs should be highlighted upfront in the form of annual percentage rates. This could impact additional business for some players, as borrowers would now be able to see the total annual costs they incur and compare them effectively with other alternatives, CRISIL said.
The standards, based on the framework recommended by a working group formed on January 13, 2021, broadly cover three areas: client protection and conduct issues; technology and data requirements; and regulatory framework.
The RBI has decided to implement some of the regulations immediately and others later, the details of which will be announced in due course. A few others have been referred to the Government of India.
As some of the NBFCs align with changing regulations, any major disruptions to business operations will be a key thing to watch. Nonetheless, the credit profiles of CRISIL-rated entities operating in this space and rated in the investment grade continue to be supported by maintaining capital buffers.
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