Digital Lending Guidelines Two Years On — Where Most NBFCs Are Still Non-Compliant

The State of Compliance — Two Years In

The RBI's Digital Lending Guidelines (September 2022) were among the most consequential regulatory interventions in recent years. They fundamentally changed how NBFCs must structure their relationships with Lending Service Providers (LSPs), how they must disclose loan terms to borrowers, and what they can and cannot do with digital channels.

Two years on, the compliance picture is uneven. Most NBFCs have made some changes — updated their loan agreements, revised LSP contracts, started displaying APR instead of flat interest rates. But the deeper structural changes that the Guidelines require are frequently missing.

Gap 1 — LSP Governance

The Guidelines require that an NBFC maintain a board-approved list of LSPs, conduct due diligence before onboarding, and take direct responsibility for the LSP's conduct with borrowers. In practice, many NBFCs treat LSPs as commercial partners rather than regulated extensions of their own operations.

The specific gaps we find most commonly: LSP agreements that do not include the mandatory clauses on grievance redressal, data sharing, and fair practice; LSP due diligence that is confined to a commercial term sheet; and no ongoing monitoring of LSP conduct with borrowers.

Gap 2 — FLDG Structure

The Guidelines cap First Loan Default Guarantees (FLDG) at 5% of the loan portfolio at the time of origination. Many NBFCs either do not know the exact FLDG exposure with each LSP partner, or have structures that embed credit enhancement in ways that effectively exceed the 5% cap.

This is a material compliance gap. The RBI is scrutinising FLDG structures in off-site supervision, and NBFCs that cannot demonstrate cap compliance risk regulatory action.

Gap 3 — Key Fact Statement (KFS)

The KFS must be provided before loan disbursement, must use the standardised format specified by the RBI, and must include the Annual Percentage Rate (APR) calculated in the prescribed manner. Most NBFCs have a KFS — but the APR calculation methodology is frequently wrong, either excluding certain fees or using a calculation basis that does not match the RBI's specification.

What to Do Now

A structured compliance review of your digital lending operations should cover: LSP agreement audit against the mandatory clauses, FLDG exposure calculation and cap verification, KFS format and APR calculation review, digital loan agreement content check, and grievance redressal integration with LSP operations.

This is not a one-time exercise. The RBI's Digital Lending Guidelines require ongoing monitoring and annual board-level review of your digital lending compliance posture.