In order to ensure innovation in and orderly growth of the ‘digital lending’ ecosystem in India while protecting the customers from widespread unethical practices, the Reserve Bank of India (“RBI”) had previously issued statutory directions titled “Guidelines on Digital Lending” on September 2, 2022 (“DLGs”) setting out the regulatory framework governing the digital lending in India with a focus on the regulation of the entities regulated by the RBI (“REs”), the ‘lending service providers’ engaged by them (“LSPs”) and their respective ‘digital lending apps’ (“DLAs”).

The DLGs became applicable to the ‘existing customers availing fresh loans’ and to ‘new customers getting onboarded’ from September 2, 2022. However, in order to ensure a smooth transition, REs were given time till November 30, 2022, to put in place adequate systems and processes to ensure that ‘existing digital loans’ (sanctioned prior to September 2, 2022) are also in compliance with the DLGs in both letter and spirit.

In order to clarify the scope and extent of application of the DLGs and address the mounting concerns of the stakeholders in digital lending ecosystem in India, the RBI has issued FAQs on “Digital Lending Guidelines” on February 14, 2023 (“FAQs”). Some of the key clarifications have been summarized below for quick reference:

1. Definition of Digital Lending: In order to avoid ambiguity in application of DLGs on lending transactions where certain parts are carried out through online means (such as customer acquisition, credit assessment, approval, disbursal, etc.) and others through physical means (such as recovery), the RBI has now clarified that as long as digital technologies are largely used for digital lending, the DLGs will apply despite the presence of some physical interface with the customers.

2. Applicability on Supply Chain Financing Loans: Since the DLGs used the term “customer” without any definitive meaning, it was not immediately clear in the DLG if the term customer referred to individual customer availing personal loan or corporate customers including MSMEs availing supply chain financing solutions (such as line of credit, early payment, etc.). The RBI has now clarified that as long as the lending transaction between RE and corporate borrower (including MSME) fall within the purview of term digital lending under the DLG, the same has to be undertaken in compliance with the DLGs.

3. Application of DLGs on EMI programs: Other than EMI programmes on credit card governed under the master direction on credit card and debit card, all loan products offered on credit cards which are not covered or envisaged under the master direction as well as all loans offered on debit cards (including EMI programmes) shall be governed by the DLGs.

4. Fund Flow: The RBI reiterated that the flow of funds between the bank accounts of borrower and RE in a lending transaction cannot be controlled directly or indirectly by a third-party including LSP. To the relief of the industry, the RBI has allowed entities offering only payment aggregation services to facilitate loan disbursals and repayments. However, if such payment aggregator is also performing the role an LSP, it must comply with DLGs and cannot provide such payment aggregation services with respect to loan disbursement and repayment.

5. Collection of Cash by Recovery Agents: The RBI has, in a bid to afford operational flexibility to the REs, clarified that REs can deploy recovery agents to recover delinquent loans in cash from the customer and thus, exempted them from the requirement of direct repayment of loan in the RE’s bank account in such situations.

6. Refund of Processing Fees: Reasonable one-time processing fee can be retained if the customer exits the loan during cooling-off period, subject to its upfront disclosure in KFS.

This update has been contributed by Jitendra Soni (Partner) and Esha Dinesh (Associate).

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