Theme: Banking and Finance 

Title: Digital Lending Guidelines 2022: One Step Forward or Two Steps
Backward?
The Digital Lending industry in India is a unique combination of fintech companies and
Regulated Entities coming together to enable a seamless lending environment and a deeper
penetration in the credit market to increase financial inclusion. Fintech companies, identified
as Lending Service Providers (“LSPs”), operate digital lending platforms which offer tailor-
made products devised using customer data. These companies collaborate with Regulated
Entities for access to capital, also identified as Balance Sheet Lenders (“BSLs”). These
Regulated Entities include commercial banks, cooperative banks, NBFCs and housing
finance companies. Regulated Entities, in turn, outsource the functions of customer
acquisition, credit risk assessment, underwriting support, collection and loan recovery to the
fintech companies.  
The RBI has released the Guidelines on Digital Lending on the basis of the recommendations
of the Working Group set up by the Reserve Bank of India in 2021.  The Working Group was
set up to study the practices of the Digital Lending industry in light of the increasing cases of
illegitimate activities, borrower harassment and suicides being reported during the COVID-
19 lockdown. The guidelines indicate a major overhaul of the digital lending landscape in
India. The guidelines seek a prohibition on pass-through accounts of the LSPs. This means
that the loan disbursal and repayment process would take place between the bank accounts of
loan borrowers and Regulated Entities only. Regulated Entities will have the onus to conduct
due diligence when entering into a partnership with an LSP, to ensure fairness in conduct
with borrowers, especially during debt collections. Both Regulated Entities and LSPs have
been mandated to appoint a nodal officer to address consumer complaints. The guidelines are
intended to increase transparency and streamline data collection by REs and LSPs, however,
there is uncertainty surrounding their successful implementation due to factors like LSP
credit risk, the ‘first loan default guarantee’ (FLDG) model arrangement between a lender
and unregulated entity, data localisation measures, protection of customer data and collection
standards. The guidelines have failed to address the specific rights of customers against the
REs, data localisation measures and verification of DLAs.
This paper covers a comparative analysis of the pre-existing regime before the enforcement
of guidelines on digital lending and the subsequent effect on the fintech players and
customers after the enforcement of the Digital Lending Guidelines by RBI. Also, the
structural framework created for governing the fintech industry in Europe in comparison to
the regulatory changes brought in India is also evaluated in the paper. The ultimate goal of
regulatory oversight is to uphold credit reporting standards, corporate governance, and
consumer protection. Financial stability and economic freedom being important tools for
businesses and the end consumer, a way-forward strategy for India would be to have an
environment where there’s encouragement for innovation in the fintech space along with
evolving regulation to curb wrongful practices.
Keywords: Digital Lending, Regulated Entities, Fintech, RBI, Loan Apps.