Digital Lending Guidelines 101: Experts Speak

Ever since RBI announced the Digital Lending Guidelines (DLG) in August 2022, all ecosystem players have started putting their efforts into becoming compliant.

Strict regulations like the:

• • ban on pooling accounts 

• • implementation of direct disbursals to borrower from Regulated entities (REs)

• • discontinuation of prepaid cards for BNPL

…and more have set all ecosystem players into action as they rethink their disbursal and repayment models.

So, how is the Indian digital lending industry dealing with these changes? Cashfree Payments organised an exclusive roundtable with industry experts like:

• • Sandeep Singh, Aditya Birla Finance

• • Aditi Olemann, Director of New Initiatives, Cashfree Payments

• • Manish Motwani, Piramal Capital and Housing Finance

• • Gaurav Dokania, Uni Cards

Catch the conversation here!

Got only a couple minutes on your hands? Worry not.
This blog will give you a quick TL;DR of their discussion, insights and the existing doubts in the ecosystem.

Let’s get started.

How are businesses ensuring adherence while ensuring business continuity since the Digital lending guidelines (DLG) rollout?

There were precursor regulations to DLG in place, so most businesses had a fair idea of what RBI intended to do.

However, the clear guidelines from DLG were widely appreciated. Now, all the ecosystem players (like Lending service providers, Regulated entities, DSPs etc) are made aware of their roles and responsibilities, and corresponding regulations they need to adhere to. 

Moreover, RBI’s directions are aimed towards customer clarity in terms of disclosures and data storage. 

So one major step for businesses was to 

1. 1. Move towards a clearer and more comprehensive form of communication with customers.  For instance, predefined formats specified by RBI for KFS, GRO details and so on. 
   2. Disclose information to customer from a  product perspective like communication like charges, identity of actual lender (in cases of co-lending fintech) 
   3. Ensure that pooling accounts are not used for lending activities which led to greater customer clarity on fund flow

Essentially, DLG is a welcome move amongst industry leaders as it:

• allows for a synchronised growth between Regulated Entities (REs) and fintechs due to added clarity on norms. 
• Helps weed out any players attempting to use regulatory loopholes to monetise grey business areas
• 
  

How can ensure that the fund flow is being handled according to guidelines while exercising flexibility?

Before the DLG, the LSPs used pooling accounts for funds before disbursing loans to customers, However, now RBI has specified that the fund flow must remain between the RE and end customer.

Here, new age technology service providers, like Cashfree Payments help both parties by enabling direct disbursal from the RE (bank and NBFCs) to the end borrower.

As a result, RE gets access to visibility and control through Dashboard/APIs for each LSP Payout Account created on the RE’s Escrow. On the other hand, Each LSP gets access to a Payout Account Dashboard/APIs to disburse money from RE Escrow. So, they can initiate payout from RE’s escrow using the TSP APIs,  check balance, statement etc for their respective borrowers.

However, players are still seeking clarification on fund flow when it comes to co-lending models and lending in specific use cases (like BNPL)

Will DLG force businesses to change their existing repayment models? If so, in what way?

As we know, LSPs accepted repayments from borrowers and forwarded to REs before the DLG came into practice. However, this resulted in rogue elements that were involved in money laundering cases. The existence of multiple players in any transaction increased the chances of such cases as well.

However, the latest DLG, RBI has specified that repayment flow must remain between the borrower and RE. 

This will also help RBI audit any fund transfers when needed with increased visibility. 

In addition to this, RBI has also added new regulations for Payment gateway/payment aggregator, Cashfree Payments. The funds are transferred through the regulated TSP’ rails from RE to the borrower. Moreover, new age tech can help all ecosystem players (REs and LSPs) to reconcile these transfers.