Formalised regulatory regime for digital banking, says RBI

Traditional banking has always been the norm in India. However, with the rise in people’s interest in performing digital transactions, we see an increasing trend towards digital banking. Therefore, it becomes necessary for the Reserve Bank of India (RBI) to formulate certain rules and regulations for the digital banking system.

The RBI refreshes rules and regulations on a timely basis, owing to the changing environment of the digital banking ecosystem. Recently, a lot of people raised concerns regarding an uncontrolled involvement of third parties, and the fluctuations in their interest rates without the customer’s notice. Therefore, the regulatory body is working on making laws that would govern banks not included in the conventionally and in non-banking finance companies.

There are various digital intermediaries developing in the Indian technological industry. To assign a certain identity to these intermediaries, RBI is providing compliance yardsticks.

Some intermediaries are as follows:

• API (Application Programming Interface), or ‘neo banks’
• Fintechs that do not want the ‘bank’ label but wish to become lenders.
• Other service providers associated with banks.

The RBI reports state that the pandemic has resulted in the growth of digital lending. Now we see multiple lending organizations across the country. This has made it very difficult for the central bank to govern all such firms. There has been an unconstrained extension of services related to finance. The individuals are allowed a host of facilities, usually unmonitored by the RBI.

With an increase in the digital landing sector, the focus on physical institutions like banks has become difficult. This might result in some confusion between the activities that are actually regulated and those that are unregulated. The formalised regulations direct their focus on understanding the evolution of digital banking, and the risks they pose.

The Working Group has laid recommendations separately for these three digital lenders:

• Organizations regulated by the RBI (Regulated Entities or REs).
• Other regulated organisations (not under RBI)
• Third-party and other unregulated organisations.

REs fall under the regulatory framework of the RBI, the point of this article’s discussion. The other regulated entities will be governed by their respective regulators under guidelines issued by the WGDL. The third category will have legislative interventions based on the decisions made by the Central Government.

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The recommendations focus on protecting private data, appropriateness and customer suitability. The guidance is provided with respect to three principles:

• Neutrality in technology: this will ensure healthy competition between the various organisations, the result of which would be increased financial benefits.
• Regulation backed by Principles: instead of being very strict on rules, the recommendations are based on principles. This ensures room for innovation.
• Addressing Regulatory Arbitrage: this enhances the integrity of the market by analysing the arbitrage in the various organisations.

How are the customers protected under the recommendations issued by the RBI for REs? 

• No third party would be involved in a loan exchange between the regulated entity and the borrower.
• Lending Service Providers will have some charges, payable only by REs and not the borrowers.
• All information, like the interest rates, moratorium period, and others, will be provided to the borrower in the form of a KFS (Key Fact Statement). This must be provided before one applies for the loan. Information on the Annual Percentage Rate is also a mandate in the KFS.
• Without the consent of the borrower, the credit limit must not be automatically raised.
• A period of cooling-off shall be provided, where the borrower can pay off the loan before their period ends.
• Any complaints against the regulated entity must be governed by a nodal grievance redressal officer.
• In case the problem of the customer is not resolved within 30 days, they can lodge a complaint under RB-IOS (Reserve Bank – Integrated Ombudsman Scheme).

Rules regarding data and technology

• DLAs should only collect data required for processing the transaction. No extra information about the customer should be collected without their consent.
• The borrowers are also given the benefit of revoking the previously given consent or deleting the records collected by the DLAs.

How will this be regulated?

• The lendings by the DLAs, must be reported to the CICs (Credit Information Companies). This must happen irrespective of the nature and tenure of the lending.
• If the merchant platforms demonstrate any new lending products, they have to be reported to the Credit Information Companies by the REs.

With the implementation of the aforementioned regulations, the Digital Banking system has been envisioned to become safer and more customer friendly.