RBI issues second warning against aggressive digital lending practices

The Reserve Bank of India has warned consumers against unauthorized digital loan applications, following persistent reports of poor loan approval and collection practices followed by some platforms. The RBI’s second warning in recent months prompted the Digital Lenders Association to issue a revised code of conduct, hours after the regulator’s notice.

In a notice released on Wednesday, the regulator said legitimate public lending activities can be undertaken by banks, non-bank financial companies registered with the RBI and other entities regulated by state governments.

Members of the public are urged to “check the background of the company / business offering loans online or through mobile apps,” the regulator said. The RBI has said consumers should never share copies of “Know Your Customer” documents with unidentified people and unverified / unauthorized applications.

The RBI has acknowledged reports of individuals and small businesses plagued by a growing number of unauthorized digital lending platforms. These reports show excessive interest rates and additional hidden fees charged to borrowers; adoption of unacceptable and authoritarian methods of recovery; and the misuse of agreements to access data on borrowers’ cell phones.

If consumers are faced with such issues, they should report these requests to law enforcement agencies or use the sachet platform, the regulator said.

This is the central bank’s second warning. In June, it reiterated its code of best practice for all lenders and requested additional documents for loan agreements signed by digital lenders. The RBI had also said that outsourcing a business activity did not lessen the obligations of the bank or the NBFC as regulatory compliance was only their responsibility.

Digital lenders publish new code of conduct

In response to the RBI warning message, the Digital Lenders’ Association said it had issued a revised code of conduct.

  • The code of conduct states that members must clearly list all costs and charges arising from the financial product or service offered. These costs should be explained with illustrations and a reimbursement schedule should be provided.
  • The effective annual interest rate of the loan should be clearly detailed in the documentation.
  • Lenders should ensure that there is no harassment or undue intimidation of customers, including practices such as calling (or threatening to call) any member of the customer’s family or any person associated with the client.
  • Lenders should follow a consent-based architecture for the data captured, along with a detailed explanation of the data captured and used.

To be sure, this code is voluntary and the ability to enforce is limited to asking lost members to leave the group.

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