8 July 2020

REGULATORY UPDATE | RBI CRACKS THE WHIP ON LENDING INSTITUTIONS

Owing to the continuing lockdown due to the Covid-19 pandemic, many digital platforms have emerged who provide quick and hassle free loans to borrowers. Banks and Non- Banking Financial Institutions (NBFCs) have also registered with certain digital platforms to provide loans to their customers. Further, certain NBFCs have been registered with the RBI as ‘digital- only’ lending entities, who provide loans to customers on their own digital platforms. Therefore it has been observed that banks and NBFCs have been lending to customers, either through their own digital platform or through a digital platform under an outsourcing agreement. In light of the above, the Reserve Bank of India (RBI) on 24 June 2020, issued a notification (Notification) to banks and NBFCs with respect to lending to customers on digital platforms.

This Notification has been issued due to increasing complaints received by the RBI against these digital lending platforms. The complaints received primarily relate to (a) excessive rates of interest; (b) non- transparent methods to calculate interest; (c) harsh recovery measures; (d) unauthorised use of personal data; and (e) general bad behaviour. It has often been seen that the digital lending platforms do not close disclose the name of the bank or NBFC who is actually providing the loan and therefore the customers do not have access to the grievance redressal mechanisms in case of an issue.

The RBI in this Notification urges banks and NBFCs to adhere to the fair practices code and outsourcing guidelines to ensure more transparency in their transactions, be in on their own digital lending platform or a digital lending platform under an outsourcing agreement. The Notification reiterates on the fact that outsourcing the lending responsibility to digital lending platforms does not in any way diminish the responsibility that banks and NBFCs have. Further, the onus is on the banks and NBFCs to adhere to any regulatory instructions issued.

The RBI has issued the following directions to banks and NBFCs with respect to their digital lending platforms:

• 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;

• Immediately after sanction but before execution of the loan agreement, the sanction letter shall be issued to the borrower on the letter head 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 creation of awareness about the grievance redressal mechanism.

The RBI has not yet disclosed the penalties for violating these directions, though the Notification mentions that the violation will be viewed seriously.

MHCO COMMENT:

With the advancement in technology, the fintech startups provide quick, hassle free loans to customers. Based on the grievance received from these borrowers, RBI vide this Notification has ensured more transparency for the customer, especially with respect to the grievance redressal mechanisms. Although the RBI has not issued a penalty for the violation, we believe that the penalties for the violation of these directions are incumbent.

The views expressed in this update are personal and should not be construed as any legal advice. Please contact us directly on +91 22 40565252 or legalupdates@mhcolaw.comfor any assistance