Impact of digital lending rules on borrowing

As a watchdog for the lending ecosystem in India, the RBI emphasized on the need for digital lenders to ensure full transparency while offering products through digital platforms. Banks and non-banking finance companies (NBFCs) would be responsible for all regulatory compliances (including those related to customer protection and product transparency), irrespective of the involvement of third parties in the credit facilitation process. Recently, the RBI governor met with select fintech companies and conveyed that it would continue to adopt a participative and consultative approach for facilitating innovation in the financial services sector.

FLDG arrangements: FLDG involves regulated lenders such as banks and NBFCs hedging their credit risk through fintech companies which help them source customers for their loan products. Typically, FLDG arrangements would involve a contractual commitment by fintech companies to compensate the lenders for customer defaults in their loan portfolio, as well as granting of collateral (cash, lien-marked fixed deposits, etc.) to the lenders. The RBI is not misplaced in its concerns that the practice of furnishing FLDG comfort could pose systemic risks to the ecosystem as a whole. This is because lenders were solely relying on the strength of the FLDG comfort provided by unregulated fintech companies.

However, the impact of restricting FLDG arrangements in the market are far reaching and merits a regulatory relook. A blanket restriction on FLDG arrangements without viable alternate solutions could derail the growth of digital lending and India’s financial inclusion efforts, and indirectly increase the cost of borrowings for consumers. This could also negatively impact the seamless sourcing of borrowers by regulated lenders through fintech companies and digital lending platforms. Customers could also be affected as lenders may rejig their loan product offerings, which could affect the loan size, tenure and pricing of such products.

Fund-flow conundrums: Under the new digital lending guidelines, the RBI has discouraged the use of pool accounts while routing loan disbursement and repayment fund-flows. A lot of market players were relying on the services provided by intermediaries, such as payment aggregators, in the fund-flow process. For example, when a customer has to repay a loan availed through a digital lending platform, the platform would integrate with a payment aggregator to offer various digital payment methods for the customer to make the loan repayment. This would necessitate the repayment fund-flows being routed through such payment aggregator, which would pool the funds in its escrow account and settle them with the lenders.

However, it appears that such arrangements would be prohibited going forward as RBI has mandated that all fund-flows must be directly made between the customer and the lender. This would adversely affect retail consumers as the process and user experience while making loan repayments could become cumbersome without the involvement of payment aggregators.

The RBI has also restricted granting of loans into e-wallets maintained by customers. This has affected various consumers who had availed customised products offered by digital lenders based on specific use-cases (which involved usage of their prepaid wallets or cards to make retail purchases through flexible credit options).

All things considered, it is difficult to escape the conclusion that the new digital lending guidelines limit the role played by fintech companies in seamlessly facilitating the offer of digital lending products to Indian consumers. For the industry to grow and thrive in the future, suitable regulatory clarifications to resolve such issues are imperative to retain the innovative digital user experience which fintech companies bring to the table.

Prashanth Ramdas is partner and Pritish Mishra is senior associate at Khaitan & Co.