Digital Lending and Fintech Regulation in India: Practical Lessons from the New RBI Regime

The Indian digital lending industry has grown from niche innovation to a mainstream credit delivery channel within a few years. Consumer loans, SME financing, and working capital credit are now processed entirely through digital platforms. This rapid growth has brought strong regulatory focus from the Reserve Bank of India (RBI). The RBI’s unified framework for digital lending now defines who can lend, how money can move, and what protections must be in place for borrowers.

For fintech companies, lenders, and investors, the challenge is practical: how to comply with these rules while maintaining business efficiency and innovation.

1. Key Compliance Pressure Points

Regulated Entity Accountability

Every loan must originate from a bank or non-banking financial company (NBFC). Even if a fintech handles credit scoring, onboarding, or collections, the liability remains with the regulated entity (RE). The RBI has clarified that REs cannot disclaim responsibility if their lending service providers (LSPs) engage in any form of misconduct.

In practical terms:

• The RE must have direct control over fund flows. Lending through fintech-controlled or third-party accounts is not permitted.

• KYC and consent collection must take place under the RE’s systems or through approved service providers.

• REs are expected to maintain detailed system audit logs and perform periodic reviews of all digital lending activities.

Example:

In 2024, several NBFC-fintech partnerships were directed to pause disbursements after the RBI found that borrower data was being routed through offshore servers and non-approved applications.

2. Disbursement and Recovery

The rule that funds must move directly between the borrower’s bank account and the RE’s bank account has changed daily operations for many fintechs. Several digital lenders previously used collection accounts or aggregators for speed and convenience, which is no longer allowed unless the aggregator is an RBI-approved payment intermediary.

Borrowers must receive prior intimation of recovery agent details. Aggressive recovery calls and automated reminders have been flagged by regulators. Fintechs using technology-based recovery tools must ensure that the tone, timing, and content of communications comply with consumer protection laws and privacy principles.

3. Data Handling and Consent

Borrower consent is now a binding regulatory requirement. Data such as income details, credit history, or device identifiers can be collected only with explicit consent and for defined purposes.

Many fintechs discovered that third-party APIs for verification or analytics were storing data independently. Even when the fintech itself did not misuse data, the RE remained liable. To avoid such risks, REs and LSPs now maintain detailed data flow maps that specify where information is stored, who can access it, and for how long it is retained.

Legal teams are inserting specific clauses in LSP agreements to cover:

• Data retention periods

• Purpose limitation for data use

• Breach notification and response timelines
  

4. Default Loss Guarantees and Risk Sharing

The RBI limits default loss guarantees (DLGs) to five percent of the loan portfolio covered. Fintech companies can no longer absorb large parts of the credit risk in return for performance-based fees.

This change has redefined commercial structures between REs and fintechs. Most lenders now treat fintechs strictly as service providers rather than partners sharing portfolio risk. Legal counsel must ensure that revenue sharing or incentive clauses comply with DLG restrictions and are disclosed transparently in financial reporting.

5. Supervision and Enforcement

The RBI’s Department of Supervision now actively monitors digital lending activities. The regulator seeks quarterly compliance certificates from REs, reviews sample LSP contracts, and checks whether digital lending apps are listed in the RBI’s public directory.

Using unregistered or unlisted apps can attract severe consequences, including blacklisting or directives to suspend operations. The public directory of approved lending apps, launched in 2025, has become a key checkpoint for lenders, investors, and customers.

6. How Compliance Teams Are Responding

Legal and compliance teams assisting fintechs and lenders have prioritized three areas:

1. Contract Review: All RE-LSP agreements are being rewritten to reflect audit, reporting, and liability clauses.

2. Data Governance: Firms are mapping data locations, API integrations, and consent flows to ensure compliance with RBI’s privacy standards.

3. Internal Oversight: Many lenders have created compliance committees that review digital lending activities and customer grievance logs on a monthly basis.

These are now standard practices rather than optional safeguards.

7. The Bigger Picture

The digital lending industry in India is transitioning from a fast-growth phase to a compliance-driven ecosystem. The RBI’s intent is not to suppress innovation but to establish accountability at every operational level.

For fintech founders, compliance must now be built into the business model from the start. For lenders, outsourcing convenience does not eliminate liability. For lawyers, drafting must move beyond commercial terms to cover inspection readiness and data integrity.

Conclusion

Digital lending regulation in India has moved from scattered circulars to a comprehensive compliance regime. The RBI’s 2025 Directions have made transparency, accountability, and data protection core requirements for every participant in the lending process.

Fintechs and lenders that treat compliance as part of their operating strategy will strengthen their credibility with regulators, investors, and customers. Those that treat it as a post-transaction exercise will find compliance lapses to be their biggest business risk.

Target Audience:

• Fintech founders, senior executives, and compliance heads managing digital lending operations.

• In-house counsels and legal teams of banks, NBFCs, and financial service providers.

• Investors and venture capital professionals evaluating fintech and digital lending businesses.

• Legal practitioners and consultants advising clients on RBI, fintech, and digital lending compliance.

• Students and researchers following developments in India’s financial technology regulation.