Digital lending is a remote and automated lending process. It involves the use of seamless digital technologies for customer acquisition, credit assessment, loan approval, disbursement, and more. Online lending is one of the fastest-growing fintech segments in India.
But how does it work? What are the benefits and challenges of digitalised lending? And what are the guidelines and regulations that govern digital lending in India?
Let us take a look!
What is Digital Lending?
Digital lending streamlines lending processes using digital tech. It covers everything from customer acquisition to loan recovery. This approach brings benefits like convenience, speed, and transparency. However, it also raises concerns about data privacy, cybersecurity, and regulatory compliance.
Digital Lending in India
In India, the digital lending landscape includes banks, non-banking financial companies (NBFCs), and fintech startups. They offer various products and services for different needs, from retail to MSMEs.
How is Digital Lending Transforming India’s Financial Sector?
Digitalised lending transforms India’s financial sector, boosting inclusion, cutting costs, and enhancing efficiency. Even rural populations can access formal credit for personal and business needs.
It offers various products tailored to diverse financial needs, including:
- Personal Loans: Quick and convenient loans for personal expenses. These come with minimal documentation requirements.
- Business Loans: These meet the capital needs of small and medium-sized enterprises (SMEs) and startups.
- Consumer Durable Loans: Loans specifically for purchasing consumer durables like electronics and appliances.
- Peer-to-Peer (P2P) Loans: Platforms facilitating lending between individuals, cutting out traditional financial intermediaries.
These cater to a wide range of financial needs and preferences.
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In September 2022, the Reserve Bank of India (RBI) issued guidelines for digital lending. These guidelines aim to ensure fair growth and safeguard customer and financial interests.
Difference Between Digital Lending and Traditional Lending
| Digital Lending | Traditional Lending |
| Online application and verification | In-person visit and paperwork |
| Fast processing and disbursal time | Slow processing and disbursal time |
| Location-independent and accessible | Location-dependent and limited |
| Flexible eligibility and creditworthiness | Rigid eligibility and credit score |
| Variable loan amount and repayment period | Fixed loan amount and repayment period |
Guidelines on Digital Lending
The RBI’s September 2022 guidelines aim to ensure transparent digitalised lending practices.
These apply to commercial banks, cooperative banks, and NBFCs.
Key areas covered include:
Scope and Applicability
Guidelines are applicable to digital lending by commercial banks, cooperative banks, and NBFCs.
Outsourcing services does not absolve responsibility; REs must ensure compliance.
Customer Protection and Conduct
Loan servicing and repayment must occur directly in the borrower’s bank account. This aims to avoid third-party accounts.
- Any fees associated with the process should be paid by the lending institutions (REs).
In other words, borrowers should not be directly charged by the service providers.
- Disclosure of APR and other loan terms upfront is mandatory.
- The lender must tell them the Annual Percentage Rate (APR) and other important terms.
- The APR is the total cost of the loan, including interest and fees, expressed as a yearly rate.
- This ensures borrowers understand the total cost of borrowing before they commit to the loan.
- Digitally signed documents, including the KFS, must be provided to borrowers upon execution of the loan contract.
- All the necessary documents, including the Key Fact Statement (KFS), must be signed digitally. Also, the lender must hand it over to the borrower.
- The KFS contains information such as the loan amount, rate, repayment schedule, etc.
- Providing these documents digitally ensures that borrowers have a record of their loan agreement.
Grievance Redressal
REs and LSPs must appoint nodal grievance redressal officers for digital lending complaints.
Complaint lodging facilities should be available on websites and DLAs.
Creditworthiness Assessment
Economic profiling of borrowers is required for creditworthiness assessment. This ensures no automatic credit limit increases without borrower consent.
Data Privacy and Technology
Data collection by DLAs/LSPs must be need-based with explicit borrower consent.
DLAs/LSPs should have clear privacy policies compliant with regulations.
There are restrictions on biometric data storage and data stored only within India.
Regulatory Compliance
Reporting of digital lending to Credit Information Companies (CICs) is mandatory.
Loss-sharing arrangements must adhere to RBI’s securitisation directions.
Digitalised lending holds immense potential in India.
However, ensuring responsible practices is crucial for sustainable growth and customer trust.
Conclusion
Digital lending holds immense potential to revolutionise the lending system in India. However, it is essential to maintain responsible practices and foster customer trust. This will ensure sustainable growth and long-term success in the digital lending ecosystem.
FAQs
The future of digital lending in India is promising, as it is expected to cross $720 Bn by 2030.
Yes, NBFCs can do digital lending, subject to the guidelines issued by the Reserve Bank of India (RBI). NBFCs leverage digital platforms to optimise operational efficiency and customer experience.
Yes, digital lending is legal in India. RBI regulates the digital lending industry and protects consumers from illegal lending practices.
Source- rbidocs.rbi.org.in, https://inc42.com
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