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Malpractices force RBI to crack down on loan apps

The RBI's guidelines come after reports that app-based lenders are using underhand methods for recovery of loans during the lockdown.

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Last Updated: Jun 25, 2020, 11.37 AM IST
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RBI-regulated lenders have been using the fintech platform under the central bank's norms that allow outsourcing.
(This story originally appeared in on Jun 25, 2020)
Concerned over the practices adopted by some of the digital lending platforms, the Reserve Bank of India (RBI) has cracked down on them and imposed several conditions for banks and non-banking finance companies (NBFCs) that lend through them.

Henceforth, any bank or NBFC that uses a digital lending platform has to provide the borrower a loan agreement on its letterhead. It must also disclose the names of the digital lending platforms it partners on its website.

The digital lending platforms, whose services are used by banks, must also disclose upfront to the customer the name of the bank or NBFC on whose behalf they are interacting with them. Also, immediately after sanction, but before the execution of the loan agreement, the sanction letter must be issued to the borrower on the letterhead of the lender.

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"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 behaviour," said the RBI in its notification to all lenders. It added that banks and NBFCs, irrespective of whether they lend through their digital lending platform or an outsourced lending platform, must adhere to the Fair Practices Code guidelines in letter and spirit.

The RBI's guidelines come after reports that app-based lenders are using underhand methods for recovery of loans during the lockdown. Since most of the app-based lenders ask for full access to the phone contacts, some are using this information to reach out to those on the contact list of borrowers. There have also been instances where the defaulting borrower has been blackmailed by recovery agents threatening to use private information.

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In recent years, many banks and finance companies have started providing automated loans based on analytics and credit score. There is also a category of fintech that offers a platform for banks and finance companies. Some of these lending apps require access to messages as they use bank alerts to assess the borrower's cash flows and diligence in bill payment.

In some cases, the app-based lenders did not disclose the actual cost of the loan after including interest and other charges. Also, in many cases, the lending platforms did not divulge who the actual lender is, thereby denying the borrower an opportunity for grievance redressal.

"The lending platforms tend to portray themselves as lenders without disclosing the name of the bank/NBFC at the backend, as a consequence of which, customers are not able to access grievance redressal avenues available under the regulatory framework," RBI said in its circular.

RBI-regulated lenders have been using the fintech platform under the central bank's norms that allow outsourcing. "It must be noted 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," the RBI said.

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