In a recent notification, RBI introduced a set of fair practice codes and outsourcing guidelines for banks and NBFCs to follow when they make use of digital lenders to outsource financial services such as providing loans and recovering dues.
But why is RBI introducing these codes now and what are they?
Addressing customer grievances
In its notification, RBI states that several banks and NBFCs have engaged digital vendors to outsource their financial services, especially when the bank or NBFC in question works on a brick-and-mortar channel of credit delivery.
Further, RBI has noted that these lending platforms often do not disclose the name of the bank or NBFC employing them, due to which customers cannot access the grievance redressal mechanisms already in place.
Additionally, there have been several customer complaints against these lending platforms pertaining to-
- Exorbitant interest rates
- Non-transparency in interest calculation
- Harsh recovery methods
- Unauthorised use of personal data
- General bad behavior
In view of these predatory malpractices, RBI has introduced fair practice codes to be followed by all banks and NBFCs engaging third-party digital vendors in order to protect customers and provide a means to address their grievances
The new fair practice codes and outsourcing guidelines
RBI has reiterated that the onus to follow guidelines is on the bank or NBFC since they are the entity engaging the services of digital lenders.
The new guidelines to be followed by any bank or NBFC making use of third-party digital vendors as notified by RBI are as follows.
- Names of digital lending platforms engaged as agents shall be disclosed on the website of banks/ NBFCs.
- Digital lending platforms engaged as agents shall be directed to disclose upfront to the customer the name of the bank/ NBFC on whose behalf they are interacting with him/her.
- Immediately after sanction but before the execution of the loan agreement, the sanction letter shall be issued to the borrower on the letterhead of the bank/ NBFC concerned.
- A copy of the loan agreement along with a copy each of all enclosures quoted in the loan agreement shall be furnished to all borrowers at the time of sanction/ disbursement of loans.
- Effective oversight and monitoring shall be ensured over the digital lending platforms engaged by the banks/ NBFCs.
- Adequate efforts shall be made towards the creation of awareness about the grievance redressal mechanism.
Any violation of these guidelines will be “viewed seriously” by regulatory entities.
Digital lending is the future
The introduction of these new regulations will encourage both financial institutions and their customers to be more open to digital lending as a feasible, quick, and well-regulated means of credit delivery.
As the sector continues to be administered and directed the right way, digital lending is set to take the Indian financial stage by storm.
According to a BCG report, the digital lending sector in India is set to be valued at over $1 Trillion over the next five years, and even RBI in its notification observes that “digital delivery in credit intermediation is a welcome development”. Growth and regulation will go hand-in-hand if Indians are to see the fruits of the coming boom in digital lending, and this RBI notification is a step in the right direction.
Digital lending enables numerous benefits to both financial institutions and their customers including quick credit delivery, low turnaround time, streamlined loan disbursement, increased financial inclusion, and the list goes on.
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