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NEW DELHI : Even though digital lending platforms made structural and functional changes to comply with most of the latest lending norms of the Reserve Bank of India, they are still working to fall in line with a few pending norms as they wait for further clarity from the regulator. Many are also striving to obtain non-banking financial company (NBFC) licenses to become a larger part of the expanding lending ecosystem.

RBI guidelines on digital lending, which came into force on 1 December, gave nearly three months for platforms to adhere to norms ensuring customer and data protection, and curtail misselling and unethical recovery practices.

Since the norms were implemented, regulated entities and fintech firms have worked closely to comply with them and rejigged many processes, including technical changes, said Sugandh Saxena, chief executive of industry body Fintech Association for Consumer Empowerment.

However, there are a few norms, primarily two, that require either further clarification or deadline extension to fully comply with, multiple startup founders and industry observers said.

For one, the rule which makes it mandatory for repayments to go directly to the regulated entity’s bank account without any pass-through account is a bone of contention. Earlier, most lending platforms used to operate via a third-party account where repayments either via NACH or through their mobile apps/web platforms were collected. From this escrow account, regulated entities like banks and NBFCs got their funds along with interest back, while platforms received their commissions.

But with RBI cracking down on the arrangement, it became a challenge for lending platforms to route the repayments of existing borrowers whose instalments go beyond 30 November, as they had to either collect another NACH linking borrowers’ accounts to regulated entities’ accounts.

“To fully comply with the customer paying directly to RE, there is a dependency on the customers, and that is why 100% compliance may not be possible by the deadline. However, most platforms were successful in linking borrowers’ bank accounts to lending partners’ accounts," said Parijat Garg, a digital lending consultant.

“Lending platforms offered incentives to borrowers to complete NACH mandate one more time," said Aditya Kumar, co-founder and chief executive, NIRO, which enables digital platforms with lending capabilities.

Buy Now Pay Later (BNPL) platform Snapmint also had to make changes to its operations to fully comply with the norms as there were a few borrowers who paid the monthly instalments directly on its app, said co-founder and director Nalin Agarwal.

Snapmint, like many other platforms relied on payment gateway platforms, which came up with solutions ensuring that repayments go directly into the bank account of regulated entities without halting at any third party accounts.

Another rule that needs more clarification is around the first loan default guarantee (FLDG) which is an arrangement between a fintech company and regulated entities in which the former compensates the latter in case of borrower defaults.

The latest RBI guideline doesn’t completely limit lending platforms or regulated entities from using FLDG arrangements. “Given the lack of clarity around FLDG, it is one area we’re looking at. In absence of FLDG, constructs around risk sharing have to be figured out," said Mayank Jain, principal at Stellaris Venture Partners.

One of the alternatives for the FLDG arrangement is the incentive system, in which regulated entities provides incentives to lending platforms based on the performance of their portfolio.

“FLDG has transformed into a performance guarantee mechanism wherein platforms receive cash incentives for bringing the business minus the penalty associated with any performance deficiency," Garg said.

Snapmint’s Agarwal, however, is of the view that such arrangements could be temporary and could last till the platform obtains an NBFC license.

Getting NBFC licenses, however, has now become a tough nut to crack for fintech platforms, as the number of applications received by RBI has increased dramatically owing to the new norms.

The regulator has recently rejected the NBFC license applications of multiple companies. Garg advises lending platforms to be more diligent now about their NBFC applications.

As obtaining NBFC licenses becomes tough, larger players are likely to acquire smaller platforms with NBFC licenses, inviting more consolidations to the sector. “A good chunk of the market didn’t have the NBFC license and that’s why there’s going to be consolidations. There’s going to be cleaning up of the market," said MyShubhLife chief executive Monish Anand.

By acquiring a registered NBFC, such players can continue their operations without having to wait for their application to be accepted by the regulator. Garg pointed out that completing an NBFC acquisition is almost equally time-taking as obtaining a fresh NBFC license.

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