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RBI had to bring in these norms as hundreds of lending apps have mushroomed over the past year or so.
RBI had to bring in these norms as hundreds of lending apps have mushroomed over the past year or so.

RBI brings in norms to curb malpractices by lending apps

  • RBI has made banks or NBFCs directly responsible for the actions of the digital platforms they have tied up with.
  • The regulator said that digital platforms and lenders must make adequate efforts towards the creation of grievance redressal mechanism.

To curb malpractices by digital lending platforms, the Reserve Bank of India (RBI) has come up with a list of measures that lenders and their partner platforms will need to follow. The regulator came up with the instructions after it received several complaints against the lending platforms relating to exorbitant interest rates, non-transparent methods to calculate interest, harsh recovery measures, unauthorized use of personal data and bad behavior.

The central bank has said that non-banking financial companies (NBFCs) and banks will have to disclose the names of the digital lending platforms that they have engaged as agents. The apps and digital platforms also need to disclose upfront the names of the lenders they have tied up with.

The platforms and lending apps will also need to send a sanctioned letter before the execution of the loan agreement on the letterhead of the partner bank or NBFC. On sanctioning of the loan, the platform or the lender will need to send a copy of the loan agreement to the borrower.

RBI also said that the bank or the NBFC will be directly responsible for the actions of the digital platforms they have tied up with. Lenders, therefore, would have to ensure that their partner digital platforms follow the RBI norms.

“With more accountability for banks and NBFCs as a part of the new norms, there would be more transparency in the system, which would ensure more stringency across the lending value chain," said Vivek Veda, chief financial officer at KreditBee, a digital lending platform, which has partnerships with six lenders.

RBI had to bring in these norms as hundreds of lending apps have mushroomed over the past year or so. Many of these apps are giving instant personal loans to borrowers at high costs. They have been operating with little transparency and have been resorting to unfair recovery tactics when borrowers default. Many such apps don’t even have a website, contact email address or helpline numbers. Read more here.

Many borrowers have complained to RBI about these apps charging high interest rates, not disclosing the partner bank or NBFC, and recovery agents harassing them by calling at odd hours, shaming defaulter with social media posts, abusing relatives and friends by calling them up, or by threatening of dire consequences in case of non-repayment.

As RBI does not regulate the lending apps, it could do little. According to sources in NBFCs, when RBI did try to find out the lenders behind the app, it could not do so due to the lack of transparency.

“It has further been observed that the lending platforms tend to portray themselves as lenders without disclosing the name of the bank or the NBFC at the backend, as a consequence of which, customers are not able to access grievance redressal avenues available under the regulatory framework," said the RBI notification.

The regulator also said that digital platforms and lenders must make adequate efforts towards the creation of grievance redressal mechanism. In case of any lapses by the digital platform, the lender will be held accountable.

“It must be noted that outsourcing of any activity by banks or NBFCs does not diminish their obligations, as the onus of compliance with regulatory instructions rests solely with them," said the notification.

These norms will bring in more transparency and better regulations, as lenders will make digital platforms they have partnered with more accountable.

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