Nearly a year after introducing the digital lending norms, the Reserve Bank of India is assessing whether players in the ecosystem are in compliance with norms. Highly placed sources say that with the capping of loss given at five per cent in July this year, it was expected that there would be moderation in growth because fintechs and regulated entities (banks and non-banks) would exercise caution while engaging in such contracts.

“However, that is barely the case and it is observed that growth higher than estimated. The overall asset quality picture of these loans seems very benign that there are reasons to believe that some of the practices which the digital lending norms intended to clamp down are still being followed in a different fashion,” said one of persons aware of the matter. 

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LSPs remain the bridge

One of the important clauses of the digital lending regulations is that the loan service provider or LSP should not be involved in handling of funds flowing from the lender to the borrower and vice versa. In majority cases, it has been observed that collections is still being done by LSPs and money doesn’t flow directly to the lender. Earlier practice was that if there was defaults were observed by fintechs in certain borrowers, they  make a certain repayment on behalf of the borrower to keep the account standard and increase the loan amount to the borrower towards the third or fourth cycle of the loan. Technically such practices were leading to evergreening of loans. “With LSPs remaining the bridge between the borrower and the lender, it is believed that such evergreening practices are still prevalent,” said a CEO of a fintech company who didn’t want to be named. “There is merit to the banking regulator relooking at the practical adherences of digital lending norms,” he said. 

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According to a CEO of a bank the practice of ‘side agreements’ are also prevalent in the industry. “Earlier some of the banks engaged in these practices to spruce loan growth, now it’s the turn of NBFCs,” said the CEO. To put things in perspective, side agreements are contract terms which don’t form part of the main agreement for reasons that they don’t fit in the overall regulatory or compliance framework. “Most fintechs are still working around the first loss default guarantee or FLDG guidelines that was announced in July,” said a CEO of a fintech company. “We are far from implementing the guidelines in a manner that it was intended,” he added. 

Industry experts say there are plenty of red flags yet to be addressed in the digital lending system which is why the RBI has stepped up its supervision to plug the gaps.