Over the past two decades, the widespread use of technology in the financial services industry has encouraged many banks and non-bank financial corporations (NBFCs) to work with digital lending platforms, simultaneously enabling them to reach a larger consumer base and simplify their operations. These platforms allow financial institutions to offer a range of hassle-free services, such as lending, account opening and credit analysis. In the context of these developments, last year’s Reserve Bank of India (RBI) notification calling on all institutes engaged in digital transactions to adhere to the Fair Practices Code requires immediate attention. .
The notification was issued in light of multiple incidents that revealed highly unethical practices followed by some financial companies. These included exorbitant interest rates on loans, non-transparent interest calculation, harsh practices to collect loans and unauthorized use of consumer data. The following guidelines are part of the RBI Code of Fair Practices, which are binding on all digital lending institutions as well as organizations that partner with them to find borrowers and / or to collect dues:
- The names of digital lending platforms engaged as agents should be disclosed on the banks / NBFC website.
- Digital lending platforms engaged as agents will be asked to disclose to the customer upfront the name of the bank / NBFC on behalf of which they are interacting with them.
- Immediately after the sanction, but before the execution of the loan agreement, the sanction letter will be issued to the borrower on the letterhead of the bank / NBFC concerned.
- A copy of the loan agreement attached to the various elements of the fee structure and / or annexes cited in the loan agreement will be provided to borrowers at the time of their sanction / loan disbursement.
- Effective monitoring and control will be provided on digital lending platforms engaged by banks / NBFC.
- Adequate efforts should be made to raise public awareness of the complaints mechanism
Protecting the interests of consumers has always been the main motivation of the national regulatory bank. The growing number of service providers and links offering easy loans to individuals doing business as retailers, small traders and others necessitated the presence of guidelines that streamline the whole process to reduce any discrepancies. In addition, it was observed that several digital lending platforms presented themselves as lenders without disclosing the name of the bank or NBFC with which they were partners, and such cases of non-disclosure were in the area of lending. a huge ambiguity. In addition, it was also noted that clients face huge problems when trying to raise grievances due to the lack of a proper structure and a transparent system.
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In response to this mismanagement, the RBI issued the “Fair Practices Code” and said that outsourcing any activity by banks or NBFCs does not release them from their obligations. Instead, the responsibility for complying with these regulations rests solely with them and they will be held responsible for any miscarriage. Whether a bank or an NBFC (including those registered to operate on “ digital-only or both digital and physical ‘credit distribution channels) uses its lending platforms or an outsourced channel, they must adhere to the Code. fair practices in letter and spirit. . Any violation of adherence to established guidelines will be thoroughly investigated and investigated. The RBI has also marked digital delivery in credit intermediation as a welcome development.
These guidelines and regulatory code of conduct will help create an environment that resonates with trust and transparency in financial services through digital lending platforms. It will help eradicate digital lenders acting as agents for unregistered NBFCs. With the presence of an ethical structure, consumers can enjoy the benefits of loans and hassle free interest facilities. In addition, these rules act as custodians of crucial customer information. By establishing a crystal clear channel of communication, these guidelines help eliminate all communication errors between lenders and borrowers regarding their loan details, interest, and other additional charges. In addition to removing communication issues, these channels provide a robust complaint resolution system for consumers, in which they can find detailed solutions to all of their issues and queries.
When it comes to borrowing and lending, it is essential that a clear, standard and systematic process is in place. In the light of these guidelines, several financial service providers have taken the initiative to introduce their set of internal rules to further advocate the cause of safeguarding the interests of the client. For example, the Fintech Association for Consumer Empowerment (FACE), a nonprofit created by a group of new-age fintech organizations, has its own code of conduct for digital lending platforms. The organization aims to establish a safe ecosystem that involves regular dialogues with industry decision makers such as the RBI, the Ministry of Finance and other planning bodies like Niti Aayog. The growth of these institutions shows that it is not just the RBI that wants a clean sector; rather, it is the entire industry working in unison to make the sphere of technological financial services a safe and transparent one.
Ranvir Singh is the co-founder and managing director of Kissht. The opinions expressed are those of the author.