On May 8, 2025, the Reserve Bank of India ("RBI") issued the RBI (Digital Lending) Directions, 2025, ("2025 Directions") which consolidate and replace earlier frameworks, including the 2022 Guidelines on Digital Lending ("2022 Guidelines") and the 2023 Guidelines on Default Loss Guarantee ("2023 DLG Guidelines"). The 2025 Directions introduce key clarifications and significant changes to strengthen India's the digital lending framework.
Key Definitions:
1. Regulated Entities ("RE"): REs include (i) all commercial banks (ii) all primary (urban) co-operative banks, state-co-operative banks, central co-operative banks (iii) all non-banking financial companies (including housing finance companies), and (iv) all-India financial institutions.
2. Digital Lending Apps ("DLAs"): DLAs are mobile and/or web-based applications, on a standalone basis or as a part of suite of functions of an application with user interface that facilitate digital lending services. It includes RE's own apps and those of LSPs engaged by the RE for credit facilitation, in conformity with RBI's extant outsourcing guidelines.
3. Lending Service Provider ("LSP"): LSPs are agents of RE, who may be another RE as well, and performs one or more of RE's digital lending functions such as customer acquisition, services incidental to underwriting and pricing, servicing, monitoring, recovery of specific loan or loan portfolio on behalf of RE in conformity with extant outsourcing guidelines issued by the RBI.
4. Default Loan Guarantee ("DLG"): DLG is a contractual arrangement between the RE and another entity, under which the latter guarantees to compensate the RE, for the loss due to default up to a certain percentage of the loan portfolio of the RE, specified upfront. Any other implicit guarantee of similar nature, linked to the performance of the loan portfolio of the RE and specified upfront, shall also be covered under the definition of DLG.
Key Provisions:
RE- LSP arrangements:
1. Contractual Agreement: Any digital lending by a RE involving LSP must be supported by a contractual agreement between RE and LSP.
2. Multi-lender LSPs: Multi-lender LSPs must display on their DLA all loan offers that match a borrower's request, including names of unmatched lenders. Each loan offer shown must clearly display key details such as RE name, loan amount, tenor, annual percentage rate ("APR"), repayment terms, and a link to the Key Fact Statement ("KFS"), to help borrowers compare offers.
Loan disbursements and repayments:
1. Borrowers' creditworthiness: RE must ensure the borrower's credit worthiness before extending any loan. The credit limit must not be increased, unless requested by the borrower.
2. Conditions for disbursements: Loans must be disbursed directly into the borrower's bank account. Exceptions are allowed only in co-lending transactions between lenders, or for specific purposes where the money is disbursed directly to the end-beneficiary. The funds must not be disbursed to a third party's account, including those of LSPs unless specifically allowed by the 2025 Directions.
3. Cooling-off period: REs must allow borrowers to exit a digital loan during a cooling-off period by repaying the principal and APR without any penalty. This cooling-off period, decided by the RE's board and disclosed in the KFS, must be at least 1 day. However, REs may charge a reasonable one-time processing fee if the borrower exits the loan during this cooling-off period.
4. Repayments: Borrowers must make all loan repayments directly to RE's bank account, without involving any third-party or intermediary accounts, including those of LSPs. Additionally, the movement of funds between the borrower and RE must not be controlled by any third party.
5. RE to pay fees, charges, etc.: Any fees or payments due to the LSP must be paid by the RE itself and must not be charged to the borrower by the LSP.
Customer protection requirements:
1. Disclosure to borrowers: REs must (i) provide a KFS; (ii) share relevant information such as summary of loan product, terms and conditions, account statements, etc.; (iii) publish details of its digital lending products, LSPs, particulars of RE's customer care, link to RBI's complaint management system and 'Sachet Portal', privacy policies, etc. on its website.
2. Grievance redressal mechanism: REs and LSPs must appoint grievance redressal officers to handle complaints and must display the contact details of such officers on their websites, the DLA platforms and KFS. Resolving all complaints shall be the responsibility of RE. If a complaint is rejected or unanswered by RE within 30 (thirty) days, or the borrower is dissatisfied with the outcome of the complaint, they may escalate it through the RBI's Complaint Management System ("CMS") or send it physically to the RBI's office, as per the official grievance redressal process.
3. Data Privacy Obligations: All data obtained must be with the express consent of the borrower. REs are responsible for data privacy, ensuring minimal data storage by LSPs, clear policies on storage of customer data, no biometric data collection or storage unless and to the extent required by law, and that all data is stored in India. They must also publish a comprehensive privacy policy on their websites disclosing details of third parties, if applicable, allowed to collect personal information through the DLAs.
Reporting obligations of RE: The Directions mandates REs to comply with two kinds of reporting –
1. Reporting to the Credit Information Companies ("CIC"): Report on details of any lending undertaken through DLAs and details of extension of structured digital lending products by RE and/or LSPs engaged by RE.
2. Reporting to RBIs through its Centralized Information Management System ("CIMS") portal: Report of all DLAs (including those of LSPs) must be submitted to RBI. RE is responsible for the accuracy and timely submission of this information, which will be published by RBI without further validation. All reporting must be completed by June 15, 2025.
Default Loss Guarantee: The 2025 Directions have introduced a comprehensive framework for DLG, focusing on:
1. Eligibility for DLG provider: RE can only enter DLG arrangements with an LSP or another RE acting as an LSP, and the LSP must be incorporated under the Companies Act, 2013.
2. Restrictions on DLG arrangements: REs are prohibited from entering DLG arrangements for (i) revolving credit facilities offered through digital lending channels or credit cards; (ii) loans already covered under credit guarantee schemes managed by trust funds; and (iii) loans facilitated by non-banking financial company peer-to-peer ("NBFC-P2P") platforms.
3. Contractual arrangement: DLG arrangements must be supported by a contractual agreement between the RE and the DLG provider.
4. Forms of DLG: DLG may be in the form of cash deposited with RE; fixed deposit maintained with schedule commercial bank with lien marked in favor of the RE; or bank guarantee in favor of the RE.
5. Cap on DLG: DLG cover on any outstanding portfolio must not exceed 5 (five) % of the total disbursed amount, and in implicit guarantee arrangements, the DLG provider shall not bear more than 5% of the underlying loan portfolio's performance risk.
6. DLG Cover: The DLG cover applies to a fixed, identifiable, and measurable loan portfolio and is not dynamic.
7. Tenor: DLG agreement must remain in force for at least the longest tenor of the loans in the underlying portfolio.
8. Invocation: RE must invoke DLG within 120 (one hundred and twenty) days of overdue unless dues are cleared earlier. The DLG amount, once revoked by RE, cannot be reinstated.
Key Changes:
The 2025 Directions significantly enhance the regulatory framework for digital lending by addressing key areas such as scope, DLG framework, multi-lender LSP arrangements, reporting infrastructure, cooling-off period, customer protection and data privacy:
1. Expanded scope of REs: The 2025 Directions establish a comprehensive, unified framework that extends coverage to include 'all-India financial institutions' which was not covered in the erstwhile guidelines.
2. DLG framework: Building on the 2022 Guidelines and the 2023 Guidelines, the 2025 Directions strengthens the DLG framework by introducing enhanced due diligence requirements for DLG providers and additional restrictions on the DLG arrangements for revolving credit facilities, loans covered by credit guarantee schemes and loans facilitated by NBFC-P2P platforms.
3. Multi-lender arrangements: A notable addition in the 2025 Directions is the introduction of specific provisions for LSPs partnering with multiple REs, mandating transparent disclosure of all potential lenders and unbiased presentation of loan offers. These requirements were not addressed in the 2022 Guidelines.
4. Reporting infrastructure: The 2022 Guidelines mandated basic reporting requirements for REs, such as reporting to CICs. However, in addition to this, the 2025 Directions have upgraded the reporting infrastructure by mandating registration of all DLAs deployed or joined by REs, through RBI's CIMS portal.
5. Cooling-off period: The 2025 Directions reduces the minimum cooling-off period from 3 (three) days [for loans with tenor of 7 (seven) days or more] to just 1 (one) day for all loans regardless of the tenor.
6. Customer Protection: The 2025 Directions increases its protection to the customers in digital lending by structuring grievance redressal mechanisms and mandating comprehensive website disclosures.
7. Data Privacy: While the 2022 Guidelines provided for basic data privacy obligations, the 2025 Directions enhances data privacy obligations in digital lending by aligning them with the Digital Personal Data Protection Act (DPDPA), 2023.
The 2025 Directions features a phased implementation approach, with immediate effect for most provisions but extended timelines for multi-lender arrangements (November 1, 2025) and DLA reporting (June 15, 2025). Overall, the 2025 Directions reflect the RBI's response to the evolving digital lending landscape, addressing emerging risks while providing a more structured regulatory environment for digital lending.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
