Context: Recently, the Reserve Bank of India (RBI) has come down heavily on banks and non-banks as it found violation of fair practices code by digital platforms that act as an agency of these lenders to sell loans.
Key Points

• The Reserve Bank of India (RBI) found violation of fair practices code by digital platforms that act as an agency of these lenders to sell loans.
• The RBI said it found the platforms tend to portray themselves as lenders without disclosing the name of the bank/ NBFC at the back end as a result of which customers were not able to access grievance redressal avenues available under the regulatory framework.
• The RBI said it was concerned due to non-transparency of transactions and violation of guidelines on outsourcing of financial services and Fair Practices Code.
• Henceforth, any bank or NBFC that uses a digital lending platform has to provide the borrower a loan agreement on its letterhead.
• It must also disclose the names of the digital lending platforms it partners on its website.

How were lending apps involved in malpractice?

• The RBI’s guidelines come after reports that app-based lenders are using underhand methods for recovery of loans during the lockdown.
• Since most of the app-based lenders ask for full access to the phone contacts, some are using this information to reach out to those on the contact list of borrowers.
• There have also been instances where the defaulting borrower has been blackmailed by recovery agents threatening to use private information.
• App-based lenders did not disclose the actual cost of the loan and  in many cases, the lending platforms did not divulge who the actual lender is, thereby denying the borrower an opportunity for grievance redressal.

Measures taken

• RBI has prescribed norms such as loan sanction letter to be issued to the borrower on the letter head of the lender concerned.
• Immediately after sanction but before execution of the loan agreement, the sanction letter must be issued to the borrower on the letter head of the bank/ NBFC concerned.
• The lenders are told to disclose the names of all digital lending platforms, engaged as agents, on the websites of banks/ NBFCs.
• The RBI has instructed that a copy of the loan agreement along with a copy each of all enclosures quoted in the loan agreement be furnished to all borrowers at the time of sanction/ disbursement of loans.