RBI pulls up banks, NBFCs for non-transparency in digital loans

Apex bank says digital platforms claim to offer hassle-free loans to individuals and small traders, but don't disclose who they are associated with

The Reserve Bank of India (RBI) on Wednesday said digital lending platforms must disclose to the customers which bank or non-bank financial company (NBFC) these platforms are working for so that customers availing so called ‘hassle free’ loans are not harassed later. 

Mounting a sharp critique on banks and NBFCs, the central bank noted that these digital platforms, of which many have emerged now, claim to offer hassle free loans to retail individuals, small traders, and other borrowers, but don’t disclose who they are associated with.  

Banks and NBFCs are either direct floaters of these platforms, some of whom are also registered with the RBI as ‘digital only’ lenders, or the financial institutions have outsourced the platform to a third party.  

“Of late, there are several complaints against the lending platforms which primarily relate to exorbitant interest rates, non-transparent methods to calculate interest, harsh recovery measures, unauthorised use of personal data and bad behavior,” the RBI said. 

According to the central bank, although digital delivery in credit intermediation is a welcome development, “concerns emanate from non-transparency of transactions and violation of extant guidelines on outsourcing of financial services and Fair Practices Code, etc. issued to banks and NBFCs.” Banks and NBFCs must adhere to such fair practice code, irrespective of whether they have outsourced their lending activities to third party service providers. 

The RBI warned that "outsourcing of any activity by banks/ NBFCs does not diminish their obligations, as the onus of compliance with regulatory instructions rests solely with them.".  

Since the bank or NBFC’s names are not disclosed in these digital platforms, the customers don't get to know who to complaint for grievance redressal, or know the regulatory mechanism available to get relief.  

The RBI said banks and NBFCs must disclose the names of third party service providers of digital platforms on their websites. 

“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,” and, “Immediately after sanction but before execution of the loan agreement, the sanction letter shall be issued to the borrower on the letter head of the bank/ NBFC concerned.” 

The customers should be given a copy of the loan agreement and other relevant data, the RBI said, adding, effective oversight and monitoring should be ensured over the digital lending platforms engaged by the banks/ NBFCs. 

Lenders must also put adequate efforts towards creation of awareness about the grievance redressal mechanism. 

Sunil Lotke, Chief Officer – Legal, Compliance & Secretarial at U GRO Capital said the new prescriptions issued by the regulator are “very important to players to acknowledge the significance of transparency in the digital credit intermediation and will ensure adherence to the extant regulations in letter and spirit.” 

According to Lotke, there are various control measures prescribed in the outsourcing guidelines and fair practices code with respect to the proper due diligence/ review of the intermediaries, lender’s responsibility for compliance & customer grievances, right to inspect the books of accounts of the intermediaries etc, but there had been "non- transparency and instances of violations of the extant regulations.”