Rewriting the Rules of Digital Lending: RBI Digital Lending Directions, 2025

Digital lending in India has revolutionized the borrowing landscape by leveraging digital platforms like mobile apps and websites to offer quick, convenient and paperless loans. Integrating advanced technology with core financial services, has simplified the loan application process, reduced approval times and made credit more accessible. In an attempt to consolidate and streamline the governance of digital lending, the Reserve Bank of India (“RBI”) has released the Reserve Bank of India (Digital Lending) Directions, 2025 on May 8, 2025 (“New Directions”). The New Directions repealed the Guidelines on Digital Lending released on September 2, 2022; RBI circular on Loans Sourced by Banks and NBFCs over Digital Lending Platforms: Adherence to Fair Practices Code and Outsourcing Guidelines and Guidelines on Default Loss Guarantee (DLG) in Digital Lending. In addition to consolidating the existing guidelines and circulars related to digital lending, the New Directions also govern transactions wherein lending service providers (“LSPs”) partner with multiple regulated entities (“REs”), for the creation of a directory of digital lending apps.

This article explores the key highlights and implications of the New Directions along with the changes to the digital lending framework.

Scope and Applicability of the New Directions

The New Directions expand the scope of the digital lending framework to cover not only commercials banks, urban and state cooperative banks and non-banking financial companies (including housing finance companies) but also All India Financial Institutions.

Strengthening the RE-LSP Relationship

A central pillar of the New Directions is the regulation of the relationship between REs and LSPs. Now, any digital lending transaction that involves an LSP must be under an agreement detailing the roles, responsibilities and liabilities of the RE as well as the LSP. The key requirements with respect to LSPs are as follows:

1. An RE is required to take necessary action against an LSP in the event of any violation of the terms outlined in the aforementioned agreement;
2. An RE is required to establish robust internal policies that include effective monitoring systems for loan portfolios generated through LSPs;
3. An RE has an obligation to collect key borrower information, specifically, age, occupation and income, as a minimum standard for assessing creditworthiness before loan approval;
4. The earlier requirement of obtaining mere consent from the borrower, has been replaced by a formal request from a borrower followed by proper evaluation of the request for credit enhancement process; and
5. An RE is required to provide the borrowers with information regarding all the available grievance redressal mechanisms. Further, the borrowers may submit a physical complaint to the RBI, in situations wherein escalation to RBI is permitted, such as complaint rejection or partial resolution by the RE.

RE-LSP arrangement involving multiple lenders

Since LSPs represent multiple lenders, they must display loan offers impartially, including clear details like loan amount, annual percentage rate (APR), tenor of loan, monthly repayment obligations and penalties (if any). Ranking of offers is allowed, but only based on a publicly disclosed unbiased metric.

Customer Centric Measures

The New Directions prioritize customer rights with a suite of protections such as:

1. Informed Borrowing
   1. A mandatory key facts statement (“KFS”) must disclose loan terms in simple language; and
   2. Digitally signed documents (e.g. sanction letters, terms and conditions) must be emailed or messaged to borrowers.
2. Transparent Disbursement and Repayment
   1. All disbursements must go directly into the borrower’s account (with limited exceptions);
   2. Repayments must be made to the RE’s account, without any third-party pass through; and
   3. LSPs cannot collect fees directly from borrowers, REs must compensate them separately.
3. Colling-Off Period – Borrowers now have a “cooling-off period”, determined by the RE’s board (minimum one day), to exit the loan without penalties (barring a nominal processing fee). Post that, prepayment norms follow RBI’s existing loan policies.
4. Effective Grievance Redressal – Both REs and LSPs must designate nodal officers for complaint handling. Borrowers dissatisfied with redressal can escalate the same to RBI’s Complaint Management System or file a physical complaint.

Data Protection and Technology Standards

Given growing concerns over data misuse, the New Directions impose the following technology and data processing requirements:

1. Data Collection – Must be purpose-specific, consent-based and minimal. Access to mobile resources (like contacts or call logs) is prohibited, barring one time KYC needs;
2. Data Storage – All borrower data must be stored within India. If processed overseas, it must be repatriated back to India and deleted from foreign servers within 24 (twenty four) hours;
3. Privacy Policies – Must be publicly available and disclose all third parties with access to
   personal data; and
4. Cybersecurity – both REs and LSPs must comply with cybersecurity norms laid down by the RBI and other authorities.

Regulating Digital Lending Apps (DLAs)

DLAs are at the frontline of the borrower experience and RBI has moved to bring them under stricter scrutiny. REs must report all DLAs, whether owned by them or their LSPs, on RBIs Centralised Information Management System. Details like app ownership, grievance officer contacts, and compliance certifications need to be submitted and updated regularly. RBI will publish this information on its website, though inclusion does not equate to endorsement.

Default Loss Guarantee (“DLG”) Framework

The New Directions reinforce the DLG framework by mandating stricter due diligence processed for DLG providers and imposing further limitations on DLG structures involving credit, loans backed by credit guarantee schemes and those offered through NBFC-P2P platforms.

Conclusion

The New Directions represent a crucial recalibration of India’s approach to digital lending. By balancing innovation with accountability, and growth with governance, the RBI has laid the foundation for a lending ecosystem that is inclusive, secure and sustainable. For borrowers, this means more transparency and safer experiences. For lenders and the fintech entities, it signals the need to rethink operations, partnerships, and data strategies.