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Noobie's Guide To Digital Lending Guidelines (DLG)


The financial regulations in India hasn't been that great in comparison to the west with glaring deficiency in having a well-defined framework to protect citizens interest, money laundering, data theft etc. In spite of these dark sides, the Digital Lending has been on the rise in India with the promise of penetrating credit to the under-serviced segments far and wide. Like how any growth opportunity that when not regulated can get abused,  digital lending space too experienced it. Thankfully the current Indian government's finance ministry headed by Mrs. Nirmala Sitharaman had taken note of these and responded well. But how? The Government of India (GoI) and the Reserve Bank of India (RBI) quickly formulated a Working Group on Digital Lending (WGDL) to come up with regulations on all digital lending done online through web portals and mobile applications. These new regulations were named Digital Lending Guidelines (DLG)

The DLG aims to address the following irregularities:

  • data privacy breaches
  • money laundering 
  • non-traceability of money trail
  • unethical business practices
  • exploitations of gullible citizens by digital lenders

As per the DLG, the players in the Digital Lending space can be classified as below:
  1. Regulated Entity (RE) / Digital Lender (DL) : is an entity that is regulated by RBI to carry out digital lending operations. Essentially the one that doles out the finance to the borrower. Some example for such NBFC digital lending entities would be PayU Finance, Shiksha Finance, Gromor Finance, Fullerton India, CreditSaison India, IIFL Finance, etc.
  2. Lending Service Provider (LSP) : is an agent of the RE who performs a subset of RE's lending functions (which includes lead acquisition, underwriting support, pricing support, any servicing/monitoring/recovery of the loans on behalf of the RE). Some examples of such entities would be: 
    • PaySense acting as LSP for PayU Finance,  
    • RazorPay acting as LSP for Gromer Finance, etc.
  3. Digital Lending App (DLA) : is the mobile-app/web-app that supports digital lending services of an RE / LSP to boost the income and productivity of every loan catered via it. Does this also include API platform for consumption by third-parties? Technically yes! Some examples include:
    • PaySense's Mobile App is a DLA for the PaySense LSP that acts as an agent for lenders like PayU Finance 
    • LazyPay's Mobile Apps a DLA for the LazyPay entity who is an LSP for PayU Finance lender 
    • KreditBee's Web app is a DLA for KreditBee entity who acts as an LSP for some of the lendors like PayU Fin, IIFL, Vivriti Capital, Cholamandalam Investments etc.

These regulations are evolving for better with time, to tighten the noose in public credit space. Some of the key mandates that you should have in your mind (if you are in the digital lending space) are below: 
  • all loans must be disbursed to the borrower/debtor through regulated bank entities only.
  • all repayments of the loans by the borrower/debtor are as well done only through the regulated bank entities.
  • all these financial transactions between the borrower and the RE lender happens only via the banks and no other entity is to be aware of these including LSPs.
  • First Loan Default Guarantee (FLDG) lending mode is barred for lack of clarity in its agreements (as of the year 2023).

Does that sound easy for you? Some questions to think through:
  1. How are Direct Selling Associates and their platform if any, categorized under DLG?
  2. How do you classify the entities that consume the B2B APIs for its digital lending and the entities that make such B2B APIs for digital lending to happen smoothly?
  3. Which data of lead/borrower can be stored by who and for how long? 
  4. Where do the Payment Aggregators (PAs) like Google Pay, Amazon Pay, etc. stand in the purview of DLG?
  5. Which entities are mandated to have Grievance Redressal Officer? Who holds accountability for the grievances?
  6. Who is responsible for communicating the change in Annual Percentage Rate (APR) to the borrower in case of floating rate loans and how is it to be communicated?
  7. Given that DLG talks of direct transactions between borrower and RE in both disbursal and repayment of loans, what happens in the case of delinquent loans - can the recovery agent be engaged to collect cash from the borrowers? If so, who bears the cost of recovery?
  8. Can a third-party or an LSP directly/indirectly control the financial transaction (flow of funds) between the bank accounts of RE and borrower?
  9. What information of a lead/borrower can an LSP retain?
  10. How would the product architecture implement DLG mandates? What measures are taken to accommodate its evolution?

The DLG changes the mechanics of how the information flows between entities and who is aware of what information. I am not sure how many financial institutions in the credit lending space has even a hang of this, to accommodate it in their flow and thus re-engineer / re-architect their systems accordingly. Given that the regulatory body is getting more and more tech savvy by the day, the non-compliant ones will be off the market and thus the competition. In Fintech, it is a war where the fittest that comply to the evolving regulatory norms would survive.

Note: This post is my understanding of DLG based on my readings and experience working with some real good entrepreneurial PMs (Ganesh Prabhu Nandan, in particular) at PayU Credit. In matters like this, I encourage open and continuous conversations to improve engagement and understanding of the complex and evolving mandates that Fintech industry is witnessing.