INTRODUCTION
The third quarter of 2022 has witnessed paradigm shifts in the existing regulatory regime in India. The Indian digital space has seen many crucial regulations being actively and promptly implemented by the Reserve Bank of India (“RBI”), which seem to have emerged in view of the manifold expansion of the digital arena in terms of presence and activities of users in the online space especially since the COVID-19 pandemic. The digital lending guidelines which have been a much-deliberated and impending change particularly in relation to the regulation of the loan service arrangements, were finally implemented with detailed instructions, while cardon-file-tokenisation eventually went live after multiple rounds of deliberations and timeline extensions. Furthermore, the soft launch and progress made with regard to the Open Network Digital Commerce has also been quite remarkable along with the exciting move of the enablement of cross-border payments through Bharat Bill Payment System.
This quarter also saw the cryptocurrency industry continue to face regulatory uncertainty, even as the RBI confirmed its intent to start rolling out central bank digital currency this year in a phased and gradual manner, by deeming it as legal tender. While this will warrant changes to other legal and regulatory frameworks in India, the consequential amendments are yet to be made effective, nevertheless making this a space to watch out for.
This newsletter highlights the key developments and measures as well as other developments in the Indian fintech space from July 01, 2022 to September 30, 2022.
RECENT REGULATORY DEVELOPMENTS
Issuance of Guidelines on Digital Lending
The RBI, by way of a press release (“Press Release”), recently announced a regulatory framework focused on the orderly growth and regulation of the digital lending ecosystem by credit facilitation through digital lending.1 The Press Release aimed to set out the applicable recommendations from the report prepared by a Working Group (“Report”) constituted by the RBI in January 2021, to curb mis-selling, unfair lending practices, and breach of data privacy.i The Report was intended to be implemented by RBI in a phased manner, through specific regulations issued by RBI. Pursuant to the Press Release, on September 02, 2022 the RBI released a circular titled ‘Guidelines on Digital Lending'2 (“Lending Guidelines”) implementing the crucial recommendations identified in the Annex I of the Press Release along with certain incremental provisions and reiterated that outsourcing arrangements entered by regulated entities (“RE”) with lending service providers (“LSP”) do not diminish the REs' obligations and REs are required to conform to the extant guidelines on outsourcing of such obligations in addition to the Lending Guidelines. The impact of the Lending Guidelines is further discussed in the ‘Industry Challenges' Section at page 6 of this newsletter.
The Lending Guidelines also prescribe regulations on matters which include, inter alia, collection, usage, sharing, and retention of only basic minimal data of the borrowers by the LSPs, regulation of loan disbursals, and repayments only from and to the account of the borrower and the RE, respectively, mandating REs to assess credit worthiness of borrowers before granting loans to them, requirement of appointment of grievance redressal officers by REs and LSPs for the purposes set out in the Lending Guidelines. Additionally, the Lending Guidelines emphasise upon the need for LSPs to be transparent in the disclosure of product features, and related terms and conditions and prescribe relevant corresponding obligations on the REs to ensure compliance.
It is noteworthy that while the directions in relation to First Loss Default Guarantee (“FLDG”) were initially incorporated as part of Annex II of the Press Release in relation to which further guidelines were yet to be prescribed and was not originally intended to be part of the recommendations approved for immediate implementation, the Lending Guidelines incorporated specific directions on FLDG and brought it into the purview of the recommendations approved for immediate implementation
As per the Lending Guidelines, FLDG arrangements are now to be viewed, assessed, and guided by the regulations applicable to synthetic securitisation under Master Direction – Reserve Bank of India (Securitisation of Standard Assets) Directions, 2021 dated September 23, 2021 (“Master Direction”), which effectively prohibits such synthetic credit arrangements.
RBI has stipulated that the Lending Guidelines will be effective from the date of the Lending Guidelines, i.e., September 2, 2022 for ‘existing customers availing fresh loans' and ‘new customers getting onboarded'. However, the RBI has clarified that the REs shall be provided time till November 30, 2022 for orderly transition and to put in place adequate systems and processes such that all new as well as existing digital loans (including those issued on September 2, 2022) are in compliance with the Lending Guidelines.
Effective date for implementing Card-on-FileTokenisation process remains unchanged3
The Card-on-File-Tokenisation (“COFT”) regime introduced by RBI in 2019 and developed over the years, mandates that entities other than card issuers and card networks shall not be allowed to store card details of any customer (“COF”) post the prescribed effective date which was eventually extended to October 1, 2022. In furtherance of this mandate, the RBI by circular3 dated July 28, 2022 confirmed that no further extension will be granted to implement the COFT regime and it will be brought into effect from October 1, 2022.
However, in view of the issues involved in implementation of the tokenisation regime, the RBI also provided corresponding interim relief to ease transition to an alternate system for guest checkout transactions and to this end allowed merchants and payment aggregators to store COF data for a maximum period of T+4 days (where ‘T' is the transaction date or the date of settlement, whichever is earlier) only for transaction settlement, upon completion of which it shall be purged. Additionally, RBI also permitted acquiring banks to continue storing COF data until January 31, 2023 for handling post-transaction activities which could be for processing of chargebacks and issuing refunds. These interim measures aim to facilitate the readiness of all the participants for handling and processing of COFT and post-transaction activities.
The circular also reiterated the penal consequences for non-compliance with the COFT regime. The impact of the COFT regime is further discussed in the ‘Industry Challenges' section at page 6 of this newsletter.
RBI allows eligible Small Finance Banks to apply for Authorised Dealer Category-I license3
Pursuant to the RBI Guidelines on Licensing of Small Finance Banks in Private Sector dated November 27, 2014 and Guidelines for ‘on-tap' Licensing of Small Finance Banks in Private Sector released by Reserve Bank on December 5, 2019, the Small Finance Banks (“SFB”) which have been authorised by the RBI as Authorised Dealer (“AD”) Category II banks can now also apply for AD Category – I license. This will however be subject to the applicant SFB's completion of 2 years of operations as AD Category II bank and compliance with the prescribed eligibility norms for AD Category I, which inter alia state that the applicant SFB must be profitable in the past 2 years, must have a minimum net worth of INR 500 crores etc.
This development, as notified by the RBI on August 8, 20224 comes with the intent of giving more flexibility to SFBs to meet their customers' foreign exchange business requirements.
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Footnotes
1. Our detailed update on the Report has been captured as part of our previous newsletter available here.
2. Our previous update on this development is available here.
3. Our previous update on this development is available here.
4. Our detailed analysis on the ODI Directions are available here.
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.
