Lending Service Providers for digital lenders: Distinguishing agency contracts and principal-to-principal contracts

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– Neha Sinha, Assistant Legal Advisor | finserv@vinodkothari.com

Introduction

Lending Service Providers (LSPs) are engaged by the Regulated Entities (REs) (banks or NBFCs) to carry out some functions of RE in connection with lenders’ functions  on digital platforms. These LSPs may be engaged in customer acquisition, underwriting support, recovery of loan, etc. As the LSPs are acting in association with REs and on behalf of REs, the question arises if LSPs are engaged as “agents” of REs or the arrangement between RE and LSP is that of on a principal to principal basis.

Aspects surrounding agency contracts are dealt with in Indian Contract Act, 1872. Principal-principal relation is not defined specifically in any statute, but the obligations and liability of both the parties is as in case of any usual commercial contract, where each party is acting independently. If it is the latter, the LSP cannot be termed as “agent”. If the LSP is not an agent, then, looking at the definition of LSP in the RBI’s Digital Lending Guidelines (discussed below), it is possible to contend that the activities of the so-called LSP do not bind the RE, as the so-called LSP, acting as a principal, is not to be treated as LSP within the meaning of the RBI Digital Lending Guidelines.

In this article, the defining features of agency contracts, in light of whether the role of LSPs is either a principal or an agent has been discussed, on the basis of the provisions of the contract law and jurisprudence thereunder.

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Outsourcing (Direct Selling Agent) v. Business Correspondent route

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– Aanchal Kaur Nagpal, Manager (finserv@vinodkothari.com)

If everything’s a priority, then nothing’s a priority. Focusing on core activities while leaving non-core functions sub-contracted to specialized experts has been one of the key modus operandi to achieve efficiency. Banks and other financial institutions are increasingly outsourcing various financial activities ranging from onboarding customers to payment recovery. Since these outsourcing agents perform the activities that a Bank is originally supposed to do, they too, come with a set of regulations from RBI, with Banks being ultimately responsible for activities of their outsourcing agents.

Based on the scope of the outsourcing function and the responsibility dawned upon such agents, RBI identifies two outsourcing modes – Business Correspondence and Direct Selling/Marketing Agents (‘DSA/DMA’), with separate guidelines for each of the two.

In this article, the author has attempted to delve into the differences and commonalities between outsourcing of financial services by Banks to business correspondents and DSAs/DMAs.

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16 NBFCs identified as Upper Layer entities for bank-like compliances

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– Anita Baid, Vice-President, VKCPL | finserv@vinodkothari.com

In line with the guidance given in the Scale Based Regulatory Framework of the RBI[1], the new regulatory framework is effective from October 1, 2022. Just one day before D-day, the RBI on September 30, has kickstarted the new regulatory version for NBFCs by identifying 16 of the 9472 odd NBFCs[2], as NBFCs constituting the Upper Layer. These entities have been asked to migrate to a bank-like regulatory system. The first step upon this identification would be to put in place a Board approved policy for the adoption of the enhanced regulatory framework applicable to NBFC-UL. Further, these entities will prepare a glide path of compliance within three months, i.e. by December 30, 2022 and the glide path itself will have two years of adherence time, i.e. by September 30, 2024.

Our resources on the SBR Framework can be read here- https://vinodkothari.com/sbr/

In-house Training on SBR Framework for NBFC-ML/UL –
https://vinodkothari.com/2022/09/in-house-training-on-sbr-framework-for-nbfc-ml-ul/
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Services and Assistance for ICAAP Implementation

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Our resources on the topic:

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Click here to view our firm profile – https://vinodkothari.com/2021/09/vkcpl-team-profile/

Structured Default Guarantees

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Analysing prevalent structures and their capital treatment

– Qasim Saif, Senior Manager | qasim@vinodkothari.com

The term that has been grabbing limelight in the world of finance, specifically for non-banking finance would be First Loss Default Guarantees (FLDGs). The growth of the fintech sector in India may be chiefly credited for making FLDGs as the latest buzzword. However, guarantees are not a new innovation; it has been commonly used in the finance sector since ages.

We are organising a Workshop on Emerging Regulatory Framework for NBFCs and digital lending on 19th, 20th and 21st September 2022. See details here – https://vinodkothari.com/2022/09/workshop-emerging-regulatory-framework-for-nbfcs/
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Workshop on Emerging Regulatory Framework for NBFCs and digital lending

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Register here: https://forms.gle/D7QTKbPDcZn3AP7y6
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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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Lending without risk and risk without lending:

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The new paradigm of lending partnerships in India

– Vinod Kothari | finserv@vinodkothari.com

In the world of lending, there is a new buzzword – sourcing partnership. This partnership entails the coming together of two entities, both which, let us presume, are financial entities. The one which has strong origination abilities partners with the one which has strong funding abilities, such that credit assets are sourced, serviced and risk-absorbed by the first one (say, Originating Partner), and are housed on the balance sheet of the latter (say, Funding Partner). The Originating Partner takes the credit risk, to a degree sufficient to absorb the expected losses and unexpected losses of the credit assets, continues to service the assets, and eats the entire excess spread, being the difference between the actual portfolio rate of return and the Funding Partner’s expected yield. The Funding Partner puts the loans on its balance sheet, gets only the expected yield, and essentially takes the risk in the Originating Partner, often collateralised by a funding deposit. Thus, the lender has loans with practically no risk, and the originator has risks with no loans.

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The Law of Co-lending

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Financial Services Division | finserv@vinodkothari.com

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