In the last two decades, the widespread use of technology in the financial services sector has encouraged numerous banks and Non-banking Financial Companies (NBFCs) to work with digital lending platforms, simultaneously allowing them to reach out to a larger consumer base and simplifying their operations. These platforms enable financial institutions to offer an array of hassle-free services, such as lending, account opening, and credit analysis. In the backdrop of these developments, the Reserve Bank of India’s (RBI) last year notification, instructing all institutes engaged in digital-based transactions to adhere to the Fair Practices Code, needs immediate attention.
The notification was issued in light of multiple incidents that revealed highly unethical practices followed by some financial firms. These included exorbitant interest rates on borrowings, non-transparent interest calculation, harsh practices to recover loans, and unauthorised usage of consumer data. The following instructions are a part of the Fair Practices Code by RBI which are binding for all digital lending institutions as well as organizations partnering with them to source borrowers and/or to recover dues:
- Names of digital lending platforms engaged as agents shall be disclosed on the website of banks/ NBFCs.
- Digital lending platforms engaged as agents shall be directed to disclose upfront to the customer, the name of the bank/ NBFC on whose behalf they are interacting with him/her.
- Immediately after sanction, but before the execution of the loan agreement, the sanction letter shall be issued to the borrower on the letterhead of the bank/ NBFC concerned.
- A copy of the loan agreement enclosed with the various components of the fee structure and/or enclosures quoted in the loan agreement shall be furnished to the borrowers at the time of their loan sanction/disbursement
- Effective oversight and monitoring shall be ensured over the digital lending platforms engaged by the banks/ NBFCs.
- Adequate efforts shall be made towards the creation of awareness about the grievance redressal mechanism
Protecting consumer interests has always been the primary motive of the nation’s regulatory bank. The increasing number of service providers and tie-ups offering easy loans to individuals operating as retailers, small-scale traders, and others necessitated the presence of guidelines that streamlines the entire procedure to curb all discrepancies. In addition, it was observed that several digital lending platforms were portraying themselves as lenders without disclosing the names of the bank or NBFC’s that they were partnered with, and such instances of non-disclosure brought to the purview of lending a tremendous amount of ambiguity. Further, it was also noted that customers faced immense trouble while trying to raise grievances due to the lack of a proper structure and transparent system.
In response to this mismanagement, the RBI issued the “Fair Practices Code “ and declared that outsourcing of any activity by banks or NBFCs does not free them from their obligations. Instead, the responsibility of complying with such regulations rests solely on them and they will be held accountable for any miscarriage of the same. Whether a bank or an NBFC (including those registered to operate on ‘digital-only or both digital and brick-mortar channels of credit delivery) utilises its lending platforms or an outsourced channel, they must adhere to the Fair Practices Code in letter and spirit. Any violation with regards to compliance with the set guidelines will undergo serious scrutiny and review. The RBI also marked the digital delivery in credit intermediation as a welcome development.
These guidelines and regulatory code of conduct will help create an environment reverberating with trust and transparency in the sphere of financial services via digital lending platforms. It will help eradicate digital lenders acting as agents for non-registered NBFCs. With the presence of an ethical structure, consumers can enjoy the benefits of hassle-free loan and interest facilities. Furthermore, these rules act as guardians of crucial customer information. By establishing a crystal clear communication channel, these guidelines help in weeding out all miscommunications between lenders and borrowers concerning the details of their loan, interests, and other additional charges. Apart from the removal of miscommunication, these channels provide a robust grievance resolution system to consumers, wherein they can find detailed solutions for all their problems and queries.
When it comes to borrowing and lending, it is critical that there is a clear, standard, and systematic process in place. In light of these guidelines, several financial service providers have taken the initiative to introduce their internal set of rules to further champion the cause of safeguarding the customer’s interests. For instance, the Fintech Association for Consumer Empowerment (FACE), a non-profit body established by a group of new-age fintech organisations, has its own set of code of conduct for digital lending platforms. The organisation aims to establish a safe ecosystem that entails regular dialogues with industry policymakers such as the RBI, Ministry of Finance, and other planning bodies like Niti Aayog. The growth of such institutions showcases how it is not just the RBI that wants a clean sector; rather, the entire industry is working in unison to make the sphere of tech-enabled financial services a safe and transparent one.
Ranvir Singh is the Co-Founder & MD of Kissht. Views expressed are the author’s own.