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Article

15 Sep 2020

Fair Practices Code for Digital Lending Platforms: An Analysis

Fair Practices Code for Digital Lending Platforms: An Analysis

September 15,2020
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Arunabh Choudhary (Partner, Juris Corp)           Aditi Joshi (Senior Associate)

Increasing use of technology in the financial sector to offer hassle-free services such as lending, account opening, credit analysis etc., has encouraged entities like banks and Nonbanking Financial Companies (“NBFCs”) to engage with digital lending platforms (“DLPs”) for reaching out to their customers. The rise in the use of such DLPs has changed the mechanism of loan distribution and therefore caused concerns around its transparency, recovery mechanism, grievance redressal etc. Hence, the Reserve Bank of India (“RBI”) vide Notification No. RBI/2019-20/258, dated 24th June 2020 (“Notification”), issued norms to ensure that the DLPs and the banks/ NBFCs strictly comply with the Fair Practices Code and Outsourcing Guidelines, irrespective of whether banks and NBFCs lend through their own DLP or through an outsourced DLP. The Notification is applicable to all the scheduled commercial banks and NBFCs (including housing finance companies), except regional rural banks.

As per the Notification, banks and NBFCs along with DLPs must follow the following instructions, while engaging DLPs as their agents to source borrowers and/ or to recover dues:

1) Names of DLPs engaged as agents should be disclosed on the website of banks / NBFCs.

2) DLPs must disclose the names of the banks / NBFCs, on whose behalf they interact with the customer.

3) Sanction letter should be issued to the customer, immediately after the sanction and prior to the execution of the loan agreement, on the letter head of the bank / NBFC.

4) A copy of the loan agreement along with a copy of all enclosures mentioned in the loan agreement should be furnished to all borrowers at the time of sanction / disbursement of loans.

5) Effective oversight and monitoring should be ensured over DLPs.

6) Efforts should be made towards creation of awareness about the grievance redressal mechanism.

7) Mandatory compliance for DLPs, banks and NBFCs involved in sourcing loans over digital platform to comply with fair practices code and outsourcing guidelines, issued by RBI and updated from time to time.

Analysis of impact of the Notification:

1) Impact on customers: From the customers’ perspective, implementation of the Notification will bring in a lot of transparency and accountability in relation to borrowing through DLPs. Having the required documentation in place will also ensure that the rights and interests of the borrowers are protected at all times.

2) Impact on banks/ NBFCs: While on one hand, this change will help in building greater trust between DLPs and their borrowers, which in turn is in the interest of the banks/ NBFCs; on the other hand, it imposes additional disclosure requirements in relation to the names of the lending partners, computation of the interest rates charged by the DLPs and the manner in which it is calculated.

The extant provisions under the existing regime viz., Guidelines on Fair Practices Code for Lender and Guidelines on Recovery Agents engaged by banks, provided under the Master Circular on ‘Loans and Advances – Statutory and Other Restrictions’ dated 1st July 2015; circular on Guidelines on Managing Risks and Code of Conduct in Outsourcing of Financial Services by banks dated 3rd November 2006; Master Circular on Customer Service in Banks dated 1st July 2015; Fair Practices Code and Directions on Managing Risks and Code of Conduct in Outsourcing of Financial Services by NBFCs provided under the Master Directions on Non-Banking Financial Company – Systemically Important Non-Deposit taking Company and Deposit taking Company (Reserve Bank) Directions, 2016 etc., already outline the fair practices code and outsourcing guidelines, thereby placing the onus of statutory compliances on banks/ NBFCs in relation to lending transactions. However, the Notification goes a step further and will now require the banks/ NBFCs to be mindful of additional compliances while structuring their partnerships with DLPs.

3) Impact on DLPs: It is pertinent to note that although the Notification seeks a better interface between lenders and borrowers, it does not require DLPs (that are distinct from banks/ NBFCs) to obtain any regulatory approvals. The DLP is still a mere intermediary providing services to consumers. However, DLPs now have to comply with the disclosure requirements prescribed under the Notification and also provide the requisite documentation to the customers, including sanction letter and the loan agreement on the letter head of the bank or NBFC. DLPs also need to be mindful of the aforementioned additional compliances under the Notification while structuring their partnerships with banks/ NBFCs.