RBI's digital lending rules designed to protect customers from online frauds: DG M Rajeshwar Rao

India central bank's recent norms on digital lending are designed to end regulatory arbitage and protect customers, Reserve Bank of India Deputy Governor M Rajeshwar Rao said today.

"The framework is designed to strike a balance between the need for an innovative and inclusive system while at the same time ensuring that the regulatory arbitrage is not exploited to the detriment to the customer's interest," Rao said at an event organised by industry body ASSOCHAM.

There was unbridled engagement of third parties, misselling, breach of data privacy, unethical recovery practices and exorbitant interest rates recently which led the RBI to regulate the activities, he added.


On August 10, India's monetary authority stipulated that all loan disbursals and repayments are required to be executed only between the bank accounts of the borrower and the regulated entity without any passthrough/ pool account of the loan service provider or any third party.

It also said that all fees and charges payable to the loan service provider will have to be paid by banks and non-banks and not by the borrower.

As part of its digital lending guidelines the RBI also mandated that all-inclusive costs of digital loans will be required to be disclosed to borrowers. Entities will have to provide a cooling-off period during which the borrowers can exit digital loans by paying the principal and the proportionate costs without any penalty.

Some players in the fintech industry have expressed concerns that the norms on lending will impact their operations.

Rao today said that the norms put the onus squarely on the regulated entities on behalf of whom the apps do the lending.

"... they will have to ensure that the loan service facilitator and the digital lending apps with whom they have outsourcing tie ups, function within the regulatory ecosystem not just in letter but also in spirit," the Deputy Governor said.

He said going forward, the passage of a recommended legislation banning lending by unauthorised entities and creation of a self regulatory organisation for the digital lenders will help the industry.

The DG said digital lending has an important role to play in India's growth especially by supporting cash flow-based lending to small businesses.

The regulatory challenge is to ensure that innovation continues in the industry, and at the same time ensure that customer's interest is not compromised, Rao said.

Rao said deepening credit is the bedrock of financial inclusion and termed access to formal credit as a force multiplier.

Having achieved successes on bank accounts - where 78 per cent of adults have a bank account now, as against 53 per cent in 2014 - we need to ensure that people take adequate credit now, which will enhance the quality of financial inclusion.

In the absence of formal credit, people have to depend on the unsustainable informal credit or personal equity, he said.

(With PTI inputs)