In September 2022, the Reserve Bank of India (RBI) issued new guidelines to regulate digital lending activities in India. The new guidelines sought to ban existing loan disbursement and repayment fund-flows, prohibit lending to e-wallets, regulate collection of fees by lending apps, mandate mandatory reporting of all digital loans to credit bureaus, collection Introduced several changes including regulating and use of customer data by fintech companies, and curbing the first loss default guarantee (FLDG) regime.
As the watchdog of the lending ecosystem in India, RBI stressed the need for digital lenders to ensure complete transparency while offering products through digital platforms. Banks and non-banking financial companies (NBFCs) will be responsible for all regulatory compliances (including those relating to customer protection and product transparency) irrespective of third party involvement in the credit facilitation process. Recently, the RBI governor met with select fintech companies and informed that it will continue to adopt a participatory and consultative approach to facilitate innovation in the financial services sector.
FLDG Arrangement: FLDG consists of regulated lenders such as banks and NBFCs who hedge their credit risk through fintech companies that help them customers for their loan products. Typically, FLDG arrangements will involve a contractual commitment by fintech companies to provide collateral (cash, lien-marked fixed deposits, etc.) to the lender as well as indemnifying the lender for defaults by customers in their loan portfolio. RBI is not wrong in its concerns that the practice of providing FLDG facility may pose systemic risk to the ecosystem as a whole. This is because the lenders were completely dependent on the FLDG facility provided by unregulated fintech companies.
However, the impact of restricting FLDG regimes in the market is far-reaching and deserves a regulatory review. A comprehensive ban on FLDG regimes without viable alternative solutions could derail the growth of digital lending and India’s financial inclusion efforts, and indirectly increase the cost of borrowing for consumers. It may also negatively impact seamless sourcing of borrowers by regulated lenders through fintech companies and digital lending platforms. Customers may also be affected as lenders may change their loan product offerings, which may affect loan size, tenure and pricing of such products.
Fund-Flow Puzzles: Under the new digital loan guidelines, the RBI has discouraged the use of pool accounts while routing loan disbursement and repayment fund-flows. Too many market players were relying on the services provided by intermediaries, such as payment aggregators, in the fund-flow process. For example, when a customer has to repay a loan taken through a digital lending platform, the platform will integrate with a payment aggregator to offer various digital payment methods to the customer to repay the loan. This would require repayment funds-flow through a payment aggregator, which would deposit the funds in its escrow account and settle them with the lenders.
However, it appears that such an arrangement will be barred from going forward as the RBI has mandated that all fund-flows must be directly between the customer and the lender. This will adversely impact retail consumers as the process and user experience while making loan repayments may become cumbersome without the involvement of payment aggregators.
RBI has also restricted lending to e-wallets created by customers. This has impacted various consumers who availed customized products offered by digital lenders based on specific use-cases (which included use of their prepaid wallets or cards to make retail purchases through flexible credit options). .
All things considered, it is difficult to escape the conclusion that the new digital lending guidelines limit the role played by fintech companies in facilitating the offering of digital lending products to Indian consumers. For the industry to grow and flourish in the future, appropriate regulatory clarification to address such issues is imperative to sustain the innovative digital user experience that fintech companies bring to the table.
Prashant Ramdas is a partner and Pritish Mishra is a senior associate at Khaitan & Company.
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