India’s RBI tightens rules for digital lenders

India’s central bank has introduced new guidelines for digital lending companies designed to improve transparency and data protection.

India has seen a surge in the number of digital lending startups as the country’s authorities push for better access to credit.

However, this has raised concerns about third-party engagement, mis-selling, breach of data privacy, unfair business conduct, charging exorbitant interest rates, and unethical recovery practices.

In response, the Reserve Bank of India set up a task force, which has now reported back with recommendations that the RBI is using to firm up its regulatory framework.

According to the guidelines, only regulated entities such as banks will be allowed to disburse and collect repayments on loans, cutting out third parties. Meanwhile, lenders must post all-inclusive digital loan costs as an annual percentage rate up front and obtain consent from borrowers before increasing credit limits.

In addition, all data collected by digital lending applications should be needs-based, should have clear audit trails, and should only be done with the prior explicit consent of the borrower.

The guidelines have been welcomed by many in the industry, with KreditBee CEO Madhusudan Ekambaram describing them as a “welcome step towards fairness and transparency”. Joginder Rana, MD of CASHe, says the rules “will help build customer confidence.”

Swapnil Bhaskar, head of strategy at neobank Niyo, called the steps promising, but warned they could “increase some technology and security costs for fintechs and also [cause] friction on the user experience”.

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