RBI's FAQs on Digital Lending Guidelines-Comprehensive Analysis

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In an attempt to navigate the Digital Lending Guidelines (DLG), Cashfree Payments did a comprehensive analysis of the RBI’s FAQs. As the forerunners in this space, we held a webinar featuring leaders from Northern Arc and Bizongo, the third one in the series of webinars focussing on DLG.

The panellists for the discussion were Pushp Raj Singh, Director of Secured Assets and LAP at Northern Arc, and Ankur Bhandari, Head of Supply Chain Finance at Bizongo. They were joined by Aditi Olemann, Director of New Initiatives and Susheel Shastry, Group Product Manager at Cashfree Payments.

Here’s the TL;DR of the 45-minute webinar session highlighting the key takeaways.

Webinar Highlights: RBI’s FAQs on Digital Lending Guidelines

DLG Applicable to ALL

Pushp Raj from Northern Arc pointed out that DLG (Digital Lending Guidelines) applies to all, be it-

The pure-play NBFCs (Non-Banking Financial Companies) with brick-and-mortar stores, sourcing the business as usual for the last decade (fill up forms, hard copies, process the loan)
The REs (Regulated Entities) with not so established infrastructure but operating predominantly through apps (in terms of the equation of the customer, underwriting, centralised interacting plus customer service)
REs in partnerships with LSPs (Lending Service Providers) that have direct interface with customers and source business via digital mode

He said that the DLG has more to do with compliance and added that 2 things have come up for REs:

The cooling-off period, like insurance, will be a game changer for the industry, and
The display of the APR (Annual Percentage Rate) to the end customer will bring a lot of compliance and diligence to the RE’s end

Although the cooling-off period is a bit surprising, most of the underlining factors were clear from day 1 itself. For example – the REs will have to take care of how to display the APRs for the customer.

Most importantly, the bottom line is that the flow of funds has to be from REs to the customer’s account and vice-versa. This fund flow will bring a lot of disruption has come in terms of creating the infrastructure by the REs altogether and then getting into re-agreements with the LSPs.

It has also taken a hit on the logistics. All NBFCs and REs are working to meet this requirement of disbursals to the customers and then back altogether to the REs barring a few loans.

Impact on Lending Service Providers

The question arises as to what is the impact on LSPs and if they have a big role to play. What are the important things from the RBI’s FAQs on digital lending guidelines for LSPs?

Ankur from Bizongo stated that the bigger challenge for the LSP is that they are considered partners for sourcing leads for REs. Otherwise, to some extent, they can do some amount of outsourcing of the activities like analysing bank statements, GST, or other financial data.

But the larger picture of an LSP is ALSO towards playing with and curating the data. This helps the lenders to make a better final decision rather than relying simply on historical data.

So today, LSPs are NOT LIMITED to distributions, getting qualified leads, digital onboarding, or customer experience.

LSPs help the REs in invoicing, disbursals, digital collections, repayment reconciliations, and tracking the movement of goods.

The current decision of the RBI is that the transaction has to happen between only the borrower and the lender. This is somewhere RESTRICTING an LSP to get the data that can play an essential role in financial inclusion.

It has affected the LSP in terms of creating a robust picture for a customer or for a borrower to avail the right amount, choosing the right lender for that matter, and scaling up his business.

Role of Payment Aggregators

Clarity on the role of PAs (Payment Aggregators) has also been a thing ever since the RBI’s announcement of DLG FAQs/FAQs on digital lending guidelines.

Aditi shared that when the DLG came out, our interpretation was always that as the PA, our job is that of collections.

The repayment entity or collection entity should NOT be construed as a third-party pooling.

But talking about the repayment flow and the disbursement flow, what is it that the lenders need to know about using PAs?

Is there any change that PAs, in general, have had to do from a product standpoint to enable repayments through them?

Sushil highlighted that with this new notification, at least one part is clear that PAs are an official moving source. They can move funds from one account to another and act as a bridge between LSPs and REs to a great extent.

So from a product standpoint, a few models are where the RE becomes the PA’s merchant and the LSP becomes a facilitator. In that context, the actual fund flow is happening between an RE and a customer. The collected repayment amount from the customer is directly disbursed into RE’s account.

The RE meets the requirement of compliance and similarly, LSP is not touching the funds. For new-age co-lending models, optimizations or customizations are possible. This will ensure that all these REs and LSPs can work together to create a craft of customer experience which is of supreme importance here.

‘Control’ – Meaning & Interpretation of the Word

The word ‘control‘ (direct or indirect) popped up a couple of times in the RBI’s FAQs on digital lending guidelines (DLG). Hence, it is necessary to know its contextual meaning.

What it means when it talks about control is the flow of funds. It should be between the bank accounts of the borrower and lender in a lending transaction.

From a PA’s standpoint, Aditi shared that the fund movement has to happen to a lender. This means that the settlement/repayment account CANNOT be that of an LSP. It always has to be that of the NBFC.

The merchant on record has to be the NBFC. At the same time, the PAs have to be aware of who the lender is.

This, of course, is different in the case of co-lending. If the LSP is an originator and lender, then the co-lending ratio decides how and where the money goes.

In that case, the originator can have specific control because they are also themselves a RE. But in cases of 100-0, money has to move into a lender.

Pushp Raj highlighted that the ‘control’ is not to question the integrity or the capability of the LSP. It is more to do with the end customer and the lender as such.

He stepped back to the genesis of the DLG by the RBI, which resulted from a lot of complaints from customers about not knowing who their lender was.

First Loss Default Guarantee (FLDG) – The Grey Area

There is still some grey area surrounding FLDG since the RBI’s FAQs on digital lending have not addressed it sufficiently.

What is FLDG (First Loss Default Guarantee)?

FLDG is where LSPs/PAs guarantee a certain percentage of compensation to lenders/NBFCs in case of a default. Despite the rolling out of the DLG, there are no guidelines regarding this. There is no update on the arrangement or the risk-sharing limits between REs and non-REs or LSPs.

It associates two problems –

Lack of attention from lenders to customers actually in need of loans
The risk of lending to some people who may not be credible enough to get that loan

However, the RE has to do a risk assessment. At least for the 100-0 lending case, it stands true but may differ in the case of co-lending.

Audience Questions on RBI’s FAQs on Digital Lending

The webinar received an overwhelming response from attendees, who raised multiple questions. The panellists answered as many as they could, and herein, we summarize them-

When you use ‘Payouts’ by Cashfree Payments, you aren’t affected by the policy changes, considering your business isn’t lending-related. Reach out to us if you’re disbursing loans or doing anything that relates to the loan journey
Co-lending allows LSPs to take repayments from customers as part of split payments. It does not apply to 100-0 lending, where no funds are put up by the LSPs
A loan product linked to insurance is NOT a must-buy, as it does not sanction the loan. It’s just a cross-selling opportunity. For example, property insurance is offered with home loans or vehicle insurance with car loans. However, the REs need to be upfront about the costs and have the customer’s consent which should be auditable. REs should display the costs in the APRs to customers fairly. This way they know what kind of insurance it is, its benefits, and how much it costs
The debit card EMIs will also fall under the DLG (Read about Debit Card Recurring Payments)
LSPs or any authorised recovery agents can recover default loans from customers on behalf of the lenders. They can collect the payment in the form of cash as long as the customer gets a confirmation that the cash has been received. Cash repayment is clearly shown on the customer’s statement of account

Wrapping Up Webinar’s Session on RBI’s FAQs on Digital Lending Guidelines

The webinar converged on the point that RBI’s Digital Lending Guidelines aim to enable sustainable growth for NBFCs, LSPs, REs and the whole ecosystem.

RBI’s DLG has been the subject of exhaustive discussion in recent months. Cashfree Payments has conducted a series of webinars on the same to gain insights from industry leaders and address audience doubts.

Read for more context: Digital Lending 2.0 – Unlocking New Opportunities