Non-banking finance companies and fintechs operating in the digital lending space are staring at a major overhaul of operations, tweaking of business models and a rise in costs after the Reserve Bank tightened the guidelines for such lending.
Digital lenders had put in place such a system wherein a customer’s entire loan journey passes through a technologically enabled system, which includes loan underwriting through alternative data sources and artificial intelligence (AI), among others.Now, with the new rules, the underlying processes, customer-facing interface, disclosures, consent, smartphone access and communication protocols will have to be changed.
What are RBI's new guidelines?
Under the new rules, regulated entities (REs) are required to disclose all costs upfront in a digital loan product to the customer, even as they are not allowed to scrub or read borrowers’ smartphones.Also, among other requirements, all loan disbursals and repayments must now be executed only between borrowers’ bank accounts and the RE without any pass-through or pool account of the lending service provider (LSP), or any other third party. Further, any fees or charges payable to LSPs in the credit intermediation process shall be paid directly by the RE and not by the borrower.Raising operational intensity
The new rules, though formed with the right spirit of customer protection, will raise the operational intensity and compliance costs for lenders in the near term, rating agency CRISIL said in an August 19 note.“The regulations on direct transfer of disbursements, repayments between borrowers and lenders will impact the ‘buy now, pay later’ services and prepaid instruments being offered. Business models will have to be tweaked to conform with the new regulations,” Krishnan Sitaraman, senior director and deputy chief ratings officer at CRISIL said.
“Another important change is the restriction imposed on scrubbing/reading the smartphones of borrowers. This was a typical part of the underwriting regimen for digital consumer loans, and it will have to be rejigged now,” he added.
Key challenges
Y S Chakravarti, managing director and chief executive officer at Shriram City Union Finance, said the digital lending guidelines will lead to greater regulation of fintechs.
“For digital lending at Shriram City Union Finance and Shriram Transport Finance, all disbursements are done only through the customer bank account and disclosure of interest rates takes place upfront,” Chakravarti said.
“We don’t facilitate automatic increases in borrower credit limit and have always followed a conservative approach. The mandatory submission of data to credit bureaus by LSPs, fintechs and aggregators is positive for banks and NBFCs. As market players adapt to the new regulations, there will be stronger oversight built over time, as was the case with banks or NBF Cs,” he said.
How fintechs are impacted
Fintech firms, which are loan intermediaries, are gearing up to comply with the new norms.As per industry group Fintech Association for Consumer Empowerment (FACE), which has no mPokket, LoanTap, PayU as its partner members, fintechs have made RBI’s new guidelines their immediate priority and are working to implement the same fully.
“Many underlying processes must be updated including the customer-facing interface, disclosures, APR (average percentage rate), consent and communication protocols,” said Sugandh Saxena, CEO of FACE.
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