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[Dhwanil Tandon is a 5th year B.A.LL.B. student at Gujarat National Law University, Gandhinagar]
The Reserve Bank of India (“RBI”) on May 8, 2025 issued its updated Digital Lending Directions (“2025 Directions”), significantly reforming and building upon its 2022 guidelines. In recent years, digital lending has proliferated across regulated and unregulated segments alike, driven by platform-based models, app-based credit delivery, and deepening use of third-party fintech service providers. The RBI’s earlier guidelines of 2022 laid foundational norms, particularly emphasising consumer protection, transparency, and proper risk attribution. However, gaps in the regulatory perimeter, inconsistent disclosures, and growing complexity in third-party arrangements necessitated further clarity and consolidation. The 2025 Directions represent a material upgrade. With precise cross-references to existing circulars and tighter oversight mechanisms, particularly in areas like default loss guarantee (“DLG”), multi-lender arrangements, and data processing. These directions aim to deepen supervisory reach while fostering trust in digital lending models. The discussion below highlights key regulatory changes and analyses their significance in shaping future conduct in digital lending.
Widening the Regulatory Net and Harmonising Frameworks
The 2022 Guidelines applied to commercial banks, co-operative banks, and non-banking finance companies (“NBFCs”) (including housing finance companies). The 2025 Directions bring all-India financial institutions (“AIFIs”), such as NABARD, SIDBI, NHB, and EXIM Bank within the regulatory net. This appears consistent with the RBI’s calibrated move to uniformly regulate credit deployment, particularly as some AIFIs have begun experimenting with technology-led lending through specialised subsidiaries or tie-ups. By explicitly including AIFIs, the RBI aims to close regulatory blind spots in entities that, though statutorily supervised, were hitherto not subject to digital lending-specific compliance.
The definitional architecture has been refined, notably through two interventions. First, the definition of annual percentage rate (“APR”) has been linked to a contemporaneous “Key Facts Statement (“KFS”) Circular for Loans & Advances”, standardising disclosure methodology across digital and physical lending. Secondly, the 2025 Directions formally introduce and define DLG. The 2022 guidelines made passing references to First Loss Default Guarantees, but the RBI’s 2023 DLG circular had remained standalone. The 2025 Directions consolidate the regime, signalling that the RBI is both accepting the commercial relevance of DLGs and determined to prevent their misuse as regulatory arbitrage.
Risk Participation and Fund Flow Controls
At the core of the 2025 Directions is Chapter VI, which formalizes the DLG regime. Under this framework, only regulated entities (“REs”) or companies are permitted to offer DLGs, and their use is expressly prohibited for credit cards or revolving credit facilities. The arrangement must be documented through explicit contractual terms and structured in the form of cash, fixed deposits, or bank guarantees. A prudential cap of 5% of the underlying loan portfolio applies, and while regulated entities retain responsibility for non-performing asset recognition, the DLG cannot be offset against individual loans. Further, the guarantee must be invoked within 120 days of an account becoming overdue, and lending service providers (“LSPs”) are required to disclose such arrangements prominently on their websites. Through this regime, the RBI appears to be enabling risk participation without compromising the attribution of credit risk, a move that could profoundly affect fintech-NBFC partnerships, many of which had previously relied on backstopped risk guarantees as a core part of their models.
The core principle from 2022 remains intact: disbursements must go directly to the borrower, and repayments directly to the RE. However, the 2025 Directions carve out two carefully measured exceptions to the strict fund flow requirements. First, salary-linked loans are permitted where repayment is routed through the employer, provided the LSP has no control over the process. Second, in delinquency cases, cash recovery is allowed as long as the recovered amounts are duly accounted for on the same day and the LSP does not charge any fee for the transaction. These exceptions reflect the RBI’s recognition of certain operational realities in niche use-cases, while ensuring that the broader systemic safeguards around fund flows remain intact.
Disclosures, Transparency and Marketplace Integrity
Earlier requirements were limited to publication of LSP names and links to digital lending apps (“DLAs”). The 2025 Directions significantly elevate the disclosure standards for regulated entities in the digital lending space. REs are now mandated to publish a comprehensive inventory of their digital lending products and digital lending apps, along with a detailed list of lending service providers and their associated DLAs, specifying the functional role each plays. They must also provide direct links to the RBI’s Complaint Management System (“CMS”) and the Sachet Portal, alongside clear disclosures of their privacy policies and customer care information. This enhanced transparency framework serves as a digital lending-specific analogue to product labelling in mutual funds or insurance, designed to empower borrowers with structured, easily accessible information prior to engagement.
Perhaps the most impactful transparency reform, REs had to report all DLAs (their own and LSP’s) to the RBI via the CIMS portal, by June 15, 2025, with the list being made publicly accessible. Although the RBI will not validate these entries, the initiative empowers users to verify app legitimacy and shifts the compliance burden to REs. In light of increasing scams via unregistered DLAs, this could act as a major confidence restoration mechanism.
Paragraph 6 of the 2025 Directions introduces granular conduct norms for LSPs when dealing with multiple REs. Effective November 1, 2025, these stipulations mandate the LSP to display a digital comparison of matched loan offers, list unmatched REs, and avoid dark patterns that may bias borrower choice. This goes beyond passive transparency. The RBI places affirmative obligations on LSPs to ensure that loan marketplaces do not devolve into predatory conduits or preference-ranking engines without logic or explanation. This is reminiscent of SEBI’s approach in mutual fund platforms, where algorithmic nudges and bias in user interfaces are viewed as material to investor protection.
Consumer Safeguards: KFS, Recovery and Exit Mechanisms
The earlier 2022 guidelines included a bespoke Annex-II KFS format, mandating disclosure of APR and penal charges. In a move towards regulatory harmonisation, the 2025 Directions supersede that format and instead refer REs to the KFS Circular of April 2024. Similarly, penal charges are now to be disclosed per the RBI’s August 2023 circular on fair lending practices. This marks a subtle yet crucial shift, consolidating disparate obligations into central circulars and avoiding duplication in fast-evolving sectors like digital lending. For REs, this reduces compliance fragmentation; for borrowers, it promises greater standardisation and comparability.
The 2022 regime required REs to share recovery agent details upon sanction or assignment. The 2025 Directions go further, mandating that borrowers be pre-informed via SMS/email before a recovery agent can contact them. This creates a clear documentary trail, reducing the risk of harassment claims, especially where rogue agents misrepresent their identity. It also aligns with recent judicial trends emphasising dignity in debt recovery.
The 2022 guidelines provided a tiered structure: three days for longer loans, one day for shorter tenors. The revised framework simplifies this to ‘minimum one day’, while explicitly permitting a reasonable processing fee on exit, if disclosed upfront in the KFS. This reflects a balancing act. While preserving the borrower’s right to cancel, it recognises that REs may incur genuine sunk costs (e.g., credit assessment fees). Regulatory stability is reinforced by alignment with prior FAQs, lending predictability.
Grievance Redressal and Data Sovereignty
While existing modes via the DLA and CMS portal remain, a new avenue is provided, physical complaints to a dedicated Chandigarh address. In an increasingly digital world, this may seem anachronistic, but for borrowers facing digital exclusion or coercion, physical avenues provide a critical safety valve.
The 2022 guidelines mandated domestic data storage, but did not stipulate protocols where data processing occurred abroad. The 2025 Directions now clarify that if data is processed offshore, it must be repatriated and deleted from foreign servers within 24 hours. This aligns with the RBI’s broader thrust on data sovereignty (e.g., the 2018 circular on payment data), and seeks to pre-empt jurisdictional conflicts in cross-border supervisory matters.
Conclusion
The 2025 Digital Lending Directions exemplify the RBI’s evolving regulatory approach, principle-based in spirit but increasingly prescriptive where systemic risks are high. By bringing much-needed clarity to the digital lending guarantee framework, enhancing borrower facing transparency, raising accountability standards for lending service providers, and harmonising disclosure requirements across circulars, the RBI is underscoring a key message that digital innovation must be anchored in prudence, accountability, and consumer trust. For regulated entities and LSPs, this translates into an urgent need for operational realignment, particularly in IT systems, documentation standards, and contractual arrangements with third parties. However, in the long term, the regulatory certainty introduced by the 2025 Directions could foster a more resilient and inclusive digital credit ecosystem.
– Dhwanil Tandon
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