FAQs on Digital Lending Regulations

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Updated on February 15, 2023

The RBI had constituted a Working Group on digital lending including lending through online platforms and mobile apps on January 13, 2021[1]. The Working Group (‘WG’) submitted its report and the same was published by the RBI on November 18, 2021[2] (‘Report’).

On August 10, 2022, the RBI issued a press release on implementation of the recommendations of the WG. The press release contains three annexures that are either applicable immediately or may be applicable in due course. Through the press release, RBI seeks to implement the recommendations and suggestions of the WG on digital lending.

Further, the RBI has issued the Guidelines on Digital Lending on September 2, 2022 (‘Guidelines’). The text of the Guidelines is largely similar to the press release, with certain modifications and insertions of footnotes.

We have developed a set of FAQs on the press release and updated the same based on the Guidelines issued by RBI, where we intend to answer some of the critical questions relating to the digital lending regulatory framework.

The following FAQs have also been updated in line with the RBI FAQs dated February 14, 2023.

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RBI Regulations on Digital Lending:

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FLDGs come under regulatory ambit

– Team Financial Services | finserv@vinodkothari.com

The RBI had constituted a Working Group on digital lending including lending through online platforms and mobile apps on January 13, 20211. The Working Group (‘WG’) submitted its report and the same was published by the RBI on November 18, 20212 (‘Report’).

On August 10, 2022, the RBI has issued a press release3 dealing with implementation of the recommendations of the working group on digital lending (‘Press Release’). Through the press release, RBI seeks to implement the recommendations and suggestions of the WG on digital lending. The press release contains three annexures, each of which deal with the following –

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Hike in repo rate: How to modify loan instalments

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– Vinod Kothari | finserv@vinodkothari.com

Based on the decision on the Monetary Policy Committee[1], the RBI, on 5th August, 2022, hiked the repo rate by 50 bps, to 5.4%. This brings the policy rate to the level where it was before the Pandemic (a brief time chart of the repo rate may be referred below). Thus, while the impact of COVID-19 may still be long and persisting, but the COVID-19 reliefs are all gone.

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The Law of Co-lending

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Financial Services Division | finserv@vinodkothari.com

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Our write-ups on related topics may be viewed here –

Exploring Core Financial Services Solution for NBFCs

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Applicability, Features, Modules & Challenges

– Subhojit Shome, Executive and Parth Ved, Executive | finserv@vinodkothari.com

Background

As a part of the overhaul for the NBFC Sector, the Reserve Bank of India (‘RBI’) had, on October 22, 2021, introduced the Scale Based Regulations (SBR): ‘A Revised Regulatory Framework for NBFCs’. Upon application of SBR, NBFCs will now be divided into four major categories starting from base layer, followed by middle and upper layers and a top layer. The categories can be briefly summarised through the below chart (visit https://vinodkothari.com/sbr/ to read our write-ups on SBR and related topics).

Overview of the Scalar Approach for Classifying NBFCs

Through SBR, various governance guidelines have been newly introduced while the existing guidelines have been modified to keep up with the current market practices. One of the requirements is the introduction of Core Financial Services Solution (CFSS) for NBFCs vide RBI circular dated February 23, 2022 (‘CFSS Circular’).

In this article, we discuss the applicability of CFSS on NBFCs, explore the current core banking systems of banks, highlight the necessary modules which can be adopted by NBFCs along with the issues that may arise during implementation.

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FAQs on Large Exposures Framework (‘LEF’) for NBFCs under Scale Based Regulatory Framework

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Financial Services Division | (finserv@vinodkothari.com)

1. Applicability –

1.1. What is the intent behind the LEF?

Response: Regulation and control of “large exposures” is a part of financial sector regulations globally to control concentration of exposures (thus, risks) to a few individuals/entities/groups. The Basel Committee of Banking Standards has been having recommendatory pieces on this topic since 1991, if not earlier.  The Basel standard subsequently became a part of the Basel capital adequacy framework. 

There is a large exposures framework in case of banks as well. 

The intent behind the large exposure framework, which essentially limits the exposures to a single entity or group or group of economically interdependent entities is to strengthen the capital regulations. Capital regulations prescribe minimum capital in case of financial entities. The adequacy of capital is obviously connected with the risks on the asset side – hence, if the assets represent exposure in a single borrower or economically connected group of borrowers, a credit event with respect to such borrower may deplete the adequacy of capital very quickly.  Hence, regulators limit the exposure to a single entity or a group.

There might be other forms of credit concentrations – for example, sectoral or geographical concentrations – these are not captured by the Framework.

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Differential Standard Asset Provisioning for NBFC-UL

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-RBI issues new guidelines on provisioning for standard assets

-Kumari Kirti | finserv@vinodkothari.com

The function of NBFCs as a supplemental route of credit intermediation alongside banks and its contribution to supporting real economic activity are well known. Within the financial sector, the NBFCs have grown significantly in terms of scale, complexity, and interconnectedness over time. Many companies have expanded to the point where they are systemically significant, necessitating the alignment of the regulatory framework for NBFCs in light of their shifting risk profile.

To address the same, RBI vide its circular dated October 22, 2021[1] has introduced Scale Based Regulation (SBR) for all NBFCs and has classified NBFCs in four layers- Base, Middle, Upper and Top layer.

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The Credit Card Business for NBFCs

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RBI Directions on Credit Cards and Co-branded Credit Cards issued by NBFCs

With the objective to provide general and conduct regulations relating to credit, debit and co-branded cards to banks and NBFCs, RBI, on April 21, 2022, has issued the Reserve Bank of India (Credit Card and Debit Card – Issuance and Conduct) Directions, 2022[1] (‘Directions’), to be applicable with effect from 1st July, 2022.

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Like banks, NBFC-UL to maintain CET-1 capital

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Manner of computation of CET-1  for NBFCs prescribed by RBI

– Qasim Saif | finserv@vinodkothari.com

Addressing risk faced by NBFCs and enhancing their capacity to absorb such risk has been a key point of consideration under the Scale Based Regulations (SBR) for NBFCs. SBR also intends to curb regulatory arbitrage available to very large NBFCs whose size of operations are more or less in line with that of banks.

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