India's central bank has introduced new guidelines for digital lending firms designed to improve transparency and data protection.
India has seen a sharp rise in the number of digital lending startups as the country's authorities encourage improved access to credit.
However, this has raised concerns about the engagement of third parties, mis-selling, breach of data privacy, unfair business conduct, charging of exorbitant interest rates, and unethical recovery practices.
In response, the Reserve Bank of India set up a working group, which has now reported back with recommendations that the RBI is using to firm up its regulatory framework.
Under the guidelines, only regulated entities such as banks will be permitted to disburse and collect re-payments on loans, cutting out third parties. Meanwhile, lenders must display all inclusive costs of the digital loan as an annual percentage rate upfront and get consent from borrowers before increasing credit limits.
In addition, any data collected by digital lending apps must be need based, should have clear audit trails and should be only done with prior explicit consent of the borrower.
The guidelines were welcomed by many in the industry, with KreditBee CEO Madhusudan Ekambaram describing them as a "welcome step towards ensuring fairness and transparency". Joginder Rana, MD of CASHe says the rules will "aid in building customer confidence".
Swapnil Bhaskar, head of strategy at neobank Niyo called the steps promising but cautioned they may "increase some tech and security cost for fintechs and also [cause] friction on user experience".