• Digital lending is the service of providing loans and credit facilities with the help of digital technologies and online platforms by assessing the creditworthiness of the borrowers with the help of data analytics.
  • Digital lending is becoming increasingly popular with the faster spread of digital finance culture, platforms, and infrastructure like faster net connectivity.
  • The RBI is taking measures to regulate the entities engaged in digital finance to ensure the overall stability of the financial system and to ensure fair play by the credit giving entities.

With the progress of digital technologies, various banking facilities are also migrating into digital mode. The first to embrace digital way was payments. In India, the revolution of UPI and other platforms templates the success of digital payments. There is no going back for other banking facilities. Now, the RBI has issued guidelines for digital lending.

What is digital lending?

Digital lending is the service of providing loans and credit facilities with the help of online platforms, digital technologies and data analytics by assessing a borrower’s creditworthiness, and thus approving and disbursing funds. It is fast becoming a popular mode of credit delivery in the context of increasing digital connectivity, services, and the culture of digital finance.

According to the RBI, “Digital lending is a remote and automated lending process, largely by use of seamless digital technologies for customer acquisition, credit assessment, loan approval, disbursement, recovery, and associated customer service.” Unlike in the case of physical lending, largescale use of digital technologies is to be used to qualify a lending as digital lending.

Following are the main features and elements of digital lending.

  1. Use of Online Platforms: Digital lending platforms are typically web-based or mobile applications that allow borrowers to apply for loans, submit necessary documentation, and track the status of their loan applications.
  2. Use of Data Analytics: Digital lending platforms rely on advanced data analytics and algorithms to assess a borrower’s creditworthiness, based on various factors such as credit history, income, employment, and social media presence. This process helps in making more accurate and faster lending decisions.
  3. Automated Processes: Digital lending platforms use automation to streamline various processes involved in loan origination, approval, and disbursement. This can significantly reduce the time taken for loan approval and disbursement.
  4. Paperless Transactions: Digital lending eliminates the need for physical paperwork, as all transactions and document submissions occur online. This not only makes the process more convenient but also reduces the chances of errors and fraud.
  5. Personalized Services: Digital lending platforms can offer personalized loan products and interest rates based on a borrower’s individual needs and credit profile. This can lead to more attractive loan offers and a better borrowing experience.
  6. Increased Access: Digital lending platforms are accessible 24/7, allowing borrowers to apply for loans at their convenience. Moreover, these platforms can cater to borrowers with diverse credit profiles, including those with limited or no credit history.
  7. Regulatory Compliance: Digital lending platforms are subject to the same regulations as traditional financial institutions, including anti-money laundering (AML) and know-your-customer (KYC) requirements. They must adhere to these regulations to ensure the security and privacy of users’ data and maintain the integrity of the financial system.

What is the regulatory initiative by the RBI on digital lending?

As a primary step to regulate the digital lending entities, the RBI appointed a Working Group on Digital Lending including Lending through Online Platforms and Mobile Apps’- on January 13, 2021. The Working Group submitted the report in November 2021.

As a follow up, the RBI issued certain basic regulations on August 10, 2022.

In the August 2022 regulations, the RBI identified three groups of entities in digital lending business.

  1. Entities regulated by the RBI and permitted to carry out lending business.
  2. Entities authorized to carry out lending as per other statutory/regulatory provisions but not regulated by RBI;
  3. Entities lending outside the purview of any statutory/regulatory provisions.

Now, who will regulate the digital lending entities?

The RBI suggested that it will regulate digital lending activities of only Regulated Entities (RE), or which are entities like Banks and NBFCs regulated by the RBI. The Reserve Bank’s regulatory framework is thus focused on the digital lending ecosystem of RBI’s Regulated Entities (REs) like banks and NBFCs and the Lending Service Providers (LSPs) engaged by them to extend various permissible credit facilitation services.

For the other unregulated group (third category), like apps engaged in digital lending, the RBI requested the central government to form suitable guidelines.

For the Regulated Entities (RE), detailed guidelines including customer protection, assessment of creditworthiness of the customers, data usage, management of loss etc. are also provided under the regulation.

RBI’s new digital lending regulation is applicable for the Regulated Entities.

While leaving the responsibility of regulating the unregulated entities under central government rules, the RBI has elaborated basic and entry level guidelines for regulating the digital lending activities of the regulated entities. All Commercial Banks, Primary (Urban) Co-operative Banks, State Co-operative Banks, District Central Co-operative Banks; and Non-Banking Financial Companies (including Housing Finance Companies) are regulated (these are called Regulated Entities) by the RBI and hence the new digital lending regulation is applicable for this group.

Does any physical interaction mean non-digital lending?

Even if a minimum level of physical interaction is made while delivering digital lending, it can be counted as digital lending according to the RBI guidelines. There are different stages for lending customer acquisition, credit assessment, loan approval, disbursement, recovery, and associated customer service etc.

According to the RBI regulations, there should be the use of seamless digital technologies ‘largely’ to be qualified for Digital Lending definition. Still, there is operational flexibility to regulated entities in ‘Digital Lending’. Hence, even if some physical interface with customer is made, the lending will qualify for the definition of Digital Lending.

There are other players in the digital lending process- the two prominent players are the Lending Service Provider (LSP) and Digital Lending Apps/Platforms (DLAs). These are the entities who provide digital lending services on behalf of regulated entities like NBFCs.

Lending Service Provider (LSP)

LSP is an agent of a Regulated Entity who carries out one or more of lender’s functions or part thereof in customer acquisition, underwriting support, pricing support, servicing, monitoring, recovery of specific loan or loan portfolio on behalf of REs in conformity with extant outsourcing guidelines issued by the Reserve Bank.

Digital Lending Apps/Platforms (DLAs)

The Digital Lending Apps are mobile and web-based applications who have the user interface for facilitating digital lending services. DLAs also includes apps of the Regulated Entities (REs) as well as those operated by Lending Service Providers (LSPs) engaged by REs for extending any credit facilitation services as per the guidelines given by the RBI.

Digital lending is slowly taking grounds in India. The regulatory measures and lending processes must be strong with time. Despite the benefits, the industry faces several challenges, such as cyber threats, privacy concerns. Hence, it is crucial for digital lending platforms to higher digital security standards and at the same time, meeting the latest regulatory requirements to maintain trust and to ensure smooth operations.

Sources: Report of the Working Group on Digital Lending.

Source: RBI press release on the Working Group Report and the guidelines on digital lending.

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