India tightens rules for digital lending

Lenders may no longer increase credit limits without the consent of the borrower.

The Reserve Bank of India (RBI) has released new guidelines for digital lending that disallows third parties from collecting and disbursing loan repayments.

In a press release published on its official website, India’s financial regulator stated that all loan disbursals and repayments are now required “to be executed only between the bank accounts of the borrower and a regulated entity (RE) without any pass-through or pool account of the lending service provider (LSP), or any third party.”

Fees and charges payable to the lender are required to be paid directly by the RE, and not by the borrower.

Automatically increasing the credit limit of the borrower without their explicit consent is now prohibited.

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Lenders are also required to be more transparent about the details of the loan to the borrower. This include requiring them to give a standardized key fact statement to the borrower before executing the loan contract, and disclosing the annual percentage rate (APR)—all-inclusive cost of digital loans—to the borrower.

Indian lenders are also now required to provide a cooling off period during which borrowers can exit digital loans by paying the principal and APR without any penalty. 

The move is expected to cut out spurious competition in the banking sector, said Maybank Investment Group’s India Research Team in a media commentary.

“This is a good step by the RBI in the interest of borrowers and also would cut out spurious competition in the banking sector,” Maybank said.