Financial inclusion has been one of the key objectives of the Reserve Bank of India. In recent years, the collaboration of fintechs with Regulated Entities (REs), that is, banks/non-banking financial companies and the enablement of digital lending have played an instrumental role in furthering RBI’s vision of financial inclusion and have revolutionised last mile lending.
While the RBI considers the benefits and the potential growth of fintechs and digital lending in India, it also understands that there may be certain risks in such endeavours. Hence, the RBI constituted a Working Group (WG) to study and examine the practices — the Report of the WG on digital lending including lending through online platforms and mobile apps (report on digital lending) was published for public comments.
Considering the inputs provided by different stakeholders, the RBI issued a press release on August 10, putting out the recommendations of the working group on digital lending – implementation.
The RBI’s approach towards the regulatory framework for digital lending seems to suggest that since the RBI has regulatory authority to govern the REs, the future course of action on the recommendations of the WG is focussed on regulations to be adhered to by the REs, their Lending Service Providers and Digital Lending Applications.
Analysis of suggestions
The transactions are to be undertaken directly between lender and borrower only. The provision of a pass-through account/pool account provided by certain fintechs which helped REs in disbursements, collections, etc., has been eliminated.
Also, the RBI’s current stance continues with not permitting disbursal of loans into full KYC compliant PPIs. While some exceptions to the disbursal, servicing, repayment, etc. process, are permitted, the disbursal process in a consumer durable loan or Buy Now Pay Later (BNPL) through a merchant platform may not get covered under the exceptions explicitly; however, there is a likelihood of it being permitted.
Buy Now Pay Later (BNPL): Reporting new digital lending products including BNPL to the credit bureaus is a welcome development that should help assess the borrower’s credit worthiness. The RBI seems to indicate that REs can provide new digital lending products including BNPL/deferred payments, etc. However, the permissibility of providing deferred payment products by unregulated entities is still not clear.
First Loss Default Guarantee (FLDG): This is under examination and has not been covered under immediate implementation. However, in the interim, where the REs are offering financial products with a guarantee being provided by a third party on default of the loan, the REs need to comply with the Securitisation Guidelines.
The requirement to follow the securitisation guidelines for an FLDG arrangement has given rise to ambiguities — with unanswered questions on aspects such as the applicability of the securitisation guidelines to FLDG arrangements only between REs and unregulated entities or also between two REs, whether unregulated entities can provide FLDG until further clarity, the requirement of additional capital charge, intent of RBI to cap the FLDG arrangements, etc.
From an overall standpoint and although detailed guidelines are to be issued separately, the REs will need to initiate steps for implementing the future course of action as given by the RBI under Annex I of the press release, on an immediate basis.
However, lack of clarity concerning certain aspects of the press release, such as adherence with securitisation norms prescribed for FLDG arrangements, has led to ambiguities, practical challenges, and chaos, on the way forward for REs, but hopefully may be resolved when the detailed guidelines/suitable clarifications are issued by the RBI.
Chhil is Tax Partner; and Bhansali is Manager, Tax, EY India. Views expressed are personal