72. Digital Lending Guidelines
Before you start reading this article… refer to earlier article on lending.
So… What is new this time? Refer to the title!
Background:
Only banks, NBFCs and MFIs are allowed to lend in India.
There are also FinTechs who lend money. As they do not have a licence, they tie up with one of the licensed entities. This model is quite popular because,
- Many NBFCs have licence but do not have ability/interest to make it big; some NBFCs view such partnership for additional growth
- FinTechs bring money power for Customer acquisition and also, tech capabilities to build better user journeys; and AI and ML to identify the ‘right’ consumer to lend (Ha.. ha… Just kidding!)
- Then there is this FLDG (First Loss Default Guarantee) arrangement: If a loan goes bust then FinTech will absorb certain portion of loss
- End-to-end customer journey (customer onboarding, loan disbursement, recovery-partial or fully) is controlled by FinTech, FinTech are following what suited them best or whatever NBFCs allowed… especially with respect to disbursement and repayment ( below diagram)
Lending is a good business…. High demand, short supply, hassles of getting loans from banks/NBFCs… this is good… but remember, such situations are prone to exploitation.
And the digital lending business played out as expected… illegal lending Apps, Chinese loan Apps mushroomed. These companies not only destroyed the business model but also, people’s lives by charging vulgar level of fees, harassing borrowers; some took extreme step of committing suicide because of these harassment.
RBI decided to put a stop to it; in Aug’22, RBI issued digital lending guidelines basis the report submitted by Working Group for Digital Lending (WGDL)
Summary of Guidelines:
Complete onus (responsibility) of partnership with digital lending Apps will be on RE (Regulated Entities); I have segregated action items based on who may implement it.
Specific to Payments:
Guidelines state that:
- Loan disbursement should happen directly from RE’s account to customer’s account (only)
- Loan repayment funds should move from customer’s account to RE’s account without any intermediary account (Will come back to this later)
Impact on FinTechs (legitimate ones)
- Cannot touch money (direct disbursement funds from NBFC partner to customer and repayment via same route)
- No FLDG arrangement
- Cannot capture and/or store data other than what is needed to issue loan and/or run operations (So no room to play ‘data’ ‘data’ game!)
Impact on Payment Aggregators:
Lending is one of the big sectors for Payment Aggregators. Read: Payments in — NBFC Sector
There are 3 major use cases: (1) Bank a/c validation (2) Disbursement (of loan amount to customer’s bank account) and (3) Repayment (Active, Passive and Reminder)
A. Bank a/c Validation:
To make sure the bank account belongs to the user
Working: Do a penny drop to the customer’s account using IMPS and receive the account beneficiary name (as per bank records). Validate whether the user’s registered name is the same as the one received.
Note: I will cover this in detail in a separate article
B. Disbursement:
Disbursement to the customer’s account is done using IMPS or NEFT rails. Reference article.
There are two main ways payout can be done (a) Recharge model (b) Connected banking model.
As per new guidelines, only model (b) is allowed; that too on RE’s (i.e. NBFCs) bank account. In this model, Payment Aggregators (PAs) will act like Technology Service Providers (TSPs).
This will impact PAs revenue and margins.
C. Collections:
Repayment is done 3 different ways [I will talk about the 4th one later].
Payment Aggregators use Escrow Account to receive funds from banks and PSPs, and then do the settlement to merchants.
Digital lending guidelines do not allow the use of intermediary accounts in repayment leg (expectation: Customer’s account → RE’s account).
If you go by the wordings of guidelines then payment aggregators cannot be used for repayment and only banks should be used. So does this PAs cannot play any role except acting like TSP.
As listed above, banks cannot offer all the solutions (e.g., All banks in Net-banking) and also, all banks do not offer all solutions or may not have good solutions. So PAs still play an important role.
Update (16th Feb): RBI clarified that PAs can be involved in collection leg as long as their responsibilities is limited to PA role (process transactions and do settlement).
If PA is performing role of LSP then they have to follow digital lending guidelines.
Here comes the 4th way — BBPS
BBPS platform facilitates bill payments (Utility, Telecom, Insurance etc.) including loan repayment. To know more about BBPS — Read Here.
Irrespective of on-us or off-us flow, the funds will move through intermediaries’ accounts.
Conclusion: PAs will act as TSP for disbursement and act as PA for collections (repayment).
Consumer:
If you are user who wants loan then do check few basics:
- Check whether the lending App is legitimate — (1) Check who is the NBFC partner for the App (2) is the NBFC licensed (Refer RBI Site) (3) Visit NBFC website and check whether the lending App is listed or not
- Do not rely on Google search for contact details (whoever pays more to Google will be shown on top) so always check the lending App (website) or NBFC site
- If the App is asking for access to your contact list or photos then do not proceed. Better look for some other lending App
- If the Lending App/NBFC is not solving your problem then raise a complaint on CMS RB-IOS website
Note: I am not a LinkedIn leader to give you ‘gyan’ about not taking loan or paying on time… I am sure if you could have, you would have… Just try to be careful!
Will we have a cleaner lending business model and companies now?
No… No regulation can fix it especially in the business where demand is high, supply is short and big money can be made.
Good FinTech/DLAs will always do good and they will adhere to guidelines but how about bad ones? It is not easy to weed them out completely so the authorities (ED, Cyber Crime), Payment Ecosystem (PAs, banks), Platforms (Play Store) and customers should keep identifying such companies and help authorities in removing them!
