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RBI’s guidelines and norms exist to ensure the structural integrity and transaction security within the lend-tech space. Despite the lending sector having seen exponential growth between 2017 to 2020, a recent report has stated that many operations being conducted under new enterprises often dive under the radar of RBI compliance guidelines -  a problematic yet current issue that the industry has faced in recent years. Traditionally, new or unregulated enterprises tend to collaborate with NBFCs and other similar establishments for operational efficiency. This has prompted the accessibility of unregulated lending practices at an increased risk ratio : Client Over-leveraging, Non-compliance of Regulations, and Hiked Collateral Rates.

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The RBI Norms outline certain guidelines designed to mitigate these risks encapsulated in the lending process -

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The FLDG Ban

First Loss Default Guarantee (FLDG) allows unregulated enterprises to offer illegitimate loans to borrowers and undertake risks for credit. The new guidelines suggest that this practice should be closely monitored and preferably abolished altogether to avoid shadow lending, and to ensure that credit risk options only be held by regulated entities.

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Elimination of Regulatory Arbitrage

Enterprises are now encouraged to consider all commodities inclusive of credit risk as lending commodities, as well as disestablish any regulatory arbitrage - in order to ensure effective KYC processing and documentation.

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Consumer Safety

Due to under-regulated establishments involved in the lending process, ensuring consumer safety has been a challenge for the RBI. New guidelines work towards strengthening the boundaries of consumer safety and promote fair debt collection practices-

> Publish transparent Annual Percentage Rate (APR)  

> Preventing exorbitant rates by following appropriate STCC guidelines

> Restrict high-risk & 0 installment short-term loans

> Limit insolvency and debt-restructuring

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SRO & DIGITAL

According to current recommendations the RBI is set to design and moderate standards through a newly established Self-Regulatory Organization (SRO) & DIGITA (Digital Trust of India Agency) for RBI compliance verification.

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Why Is This Important?

The regulations illustrated by the RBI creates a reasonable structure for the finance industry  and empowers development, while safeguarding the consumer population - limiting dangers in the industry’s framework. Executed effectively, it is expected to assist in avoiding losses while promoting growth in the lend-tech and fin-tech ecosystems. 

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With better lending environments and increasingly strict security measures being put in place for risk mitigations, the enterprises of the industry face a new challenge - seamless adaptation towards RBI compliance. In the event of non-compliance, enterprise operations face the risk of being negatively impacted, possibly even being suspended. The best way to avoid this is by applying an RBI compliant service provider to the enterprise’s system of operations - such as Encore 360°!

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ENCORE 360° is the flagship product suite compiled by Sensei Technologies - A one-stop integrated and customizable API solution that ensures RBI compliance. Encore’s Lend-tech solutions fully automate & digitize every step involved in financing, while also organizing a streamlined in-field management system. 

Click here for more information. Encore 360