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Digital Lending - Moving Towards Regulation

The growth of digital lending applications has been steady in the early years of this decade. However, there has been a stark rise in digital lending platforms and disbursals made by them in the past 2-3 years. As per a report by Inc 42[1], the digital lending market is all set to expand further to 4.75 times to $1.3 trillion in the coming decade, by 2030 from the current $270 trillion in 2022.


The rise of digital lending may be attributed to the convenience it comes with - both, in terms of access and sanctions. Prospective borrowers are able to access the lending facilities through their smartphones and do not necessarily require the physical branches of the financial institution - like banks. The same serves the unbanked population of society. Further, the credit sanction process is simple - the applications are processed quickly, with simpler credit checks. Accordingly, the amount is sanctioned and disbursed quickly. Digital lending primarily involves the disbursement of small ticket-size loans and is primarily meant to satisfy the immediate credit needs of the borrower.


Initially, the scope of RBI regulations was limited to physical lending. However, with the growth in digital lending, the RBI has prescribed various guidelines from time to time. The RBI listed out certain digital-lending-specific compliances vide its circular dated June 24, 2020[2] which were later translated into full-fledged guidelines (‘Digital Lending Guidelines’) notified vide notification dated September 02, 2022[3], owing to the growth of the digital lending space. The Digital Lending Guidelines were put in place post the report of the working group dated November 18, 2021[4] (‘Report of the working group’), out of which the selected recommendations were published vide notification dated August 10, 2022[5] (‘Recommendations of the working group’).


In this article, we briefly touch upon the lending processes that qualify as “digital lending”, the participants in the digital lending transaction. Further, we analyse the Digital Lending Guidelines vis-a-vis the erstwhile framework for digital lending transactions.


The Digital Lending Ecosystem


Meaning of Digital Lending


The Digital Lending Guidelines define digital lending as a remote and automated lending process, largely by use of seamless digital technologies for customer acquisition, credit assessment, loan approval, disbursement, recovery, and associated customer service.


The Report of the Working Group highlighted the absence of a universally accepted meaning of ‘digital lending’. However, it highlighted one of the prerequisites of a digital lending transaction- i.e. intermediation majorly over digital channel or assisted by digital channel.


Further, the definition mentioned hereinabove indicates that a major part of the lending transaction should be in online mode, by use of technology. However, some parts of the digital lending process may be in offline mode. The same has been reiterated in the FAQs on digital lending guidelines released by the RBI[6] (‘Digital Lending FAQs’).


Notably, the ambit of "lending" is not limited to simple loan products, but also extend to structured loan products such as buy-now-pay-later products, loans on the basis of debit cards and installments on credit cards, which are not covered under the Master Direction – Credit Card and Debit Card – Issuance and Conduct Directions, 2022 ('Credit Card Directions') prescribed by the RBI.


Participants in a Digital Lending Transaction


The digital lending ecosystem primarily consists of the following participants:

It is noteworthy that any entity involved in the aforesaid function shall be classified as a "lending service provider" i.e the classification as an LSP is not based on the type of entity, but on the basis of functions it performs. For instance, payment aggregators playing any of the aforesaid roles will be classified as LSPs, irrespective of their core work area of payment aggregation.


Digital Lending Regulatory Framework


Through the Digital Lending Guidelines, the regulator aims to ensure that regulated entities are regulated at a sufficient level, commensurate to the risk posed by them to the financial system. Prior to notification of the Digital Lending Guidelines, digital lending applications were not regulated by any regulator. However, owing to the growth of the digital lending space, the RBI resolved to put in place a regulatory framework for constructively facilitating digital lending transactions to ensure that the area grows in a regulated manner. Under the erstwhile framework, the digital lending applications or lending service providers were classified as outsourcing agents of the regulated entities. Accordingly, the entities were governed by the outsourcing guidelines and ancillary instructions.


In the following table, we will analyse and compare the provisions under the earlier regulatory framework and the recently notified Digital Lending Guidelines.

The comparative analysis may be accessed here.

Conclusion and Way Forward


The RBI has, time and again, adopted an “ex-post approach” for ensuring a balanced regulation in the digital lending domain. With the aforesaid prescriptions, the regulator seems to have made a well-balanced move. Apart from loans, the Digital Lending Guidelines seek to regulate other credit products, such as buy now pay later products and loans on debit cards. The prescription ensures that disguised credit products are also suitably accounted for in the digital lending ecosystem. It will be interesting to see the development of what we may call, a whole new regulatory regime – which is still at the nascent stages.

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