The Reserve Bank of India (RBI), through its May 8, 2025 notification, has laid down a revised and stringent regulatory framework for all digital lending activities. These directions are intended to eliminate regulatory arbitrage, protect borrower interests, and ensure systemic stability in the digital credit ecosystem.

The impact on Fintechs is both transformational and strategic: the new rules formalize the role of digital platforms while imposing significant operational, compliance, and partnership obligations. For Fintechs—whether operating as Digital Lending Apps (DLAs), Loan Service Providers (LSPs), or infrastructure enablers—this is a moment to recalibrate their strategies.

Strategic Shift for Fintechs

The new regulations require Fintechs to pivot from loosely regulated lending facilitators to compliance-first, partnership-driven enablers. Only RBI-regulated entities (REs) i.e banks and NBFCs—are permitted to disburse and collect loans. Fintechs must now act in regulated roles as Loan Service Providers (providing back-end services to banks/NBFCs) or as Digital Lending Apps (interfaces used by banks/NBFCs to acquire and serve customers). The strategic focus for Fintechs will be:

• Transitioning to technology partners or co-lenders rather than direct lenders.
• Replacing ownership of loan books with fee-based service models, including underwriting, customer on-boarding, data analytics, and collection services.
• Building capabilities to offer Default Loss Guarantees (DLGs) under clearly defined and reported agreements with banks/NBFCs, within prescribed limits (up to 5% of the loan book).

Key Regulatory Requirements Impacting Fintechs:

Legal & Structural Compliance

• Only banks/NBFCs can undertake lending; Fintechs must act via them.
• All Digital Lending Apps must be disclosed to RBI by the bank/NBFC and listed publicly.
• Lending transactions must be executed solely between borrower and bank/NBFC; Loan Service Providers and Digital Lending Apps must not hold or direct loan funds or repayments.

Default Loss Guarantee (DLG) Provisions

• DLGs are permitted but heavily regulated.
• DLG arrangements must be in the form of legally enforceable contracts and reported to RBI via the bank/NBFC.
• Exposure under DLG cannot exceed 5% of the loan portfolio on which the Fintech is offering the guarantee.

Data Privacy and Customer Protection

• Borrower consent must be explicit, prior, and revocable.
• Digital Lending Apps are prohibited from accessing contacts, call logs, and media files unless essential and explicitly consented.
• Biometric data must not be collected or stored by Digital Lending Apps or Loan Service Providers.
• The Key Fact Statement (KFS) must be provided before loan sanction, outlining interest rates, fees, repayment schedule, total cost of credit, and grievance redressal details.

Transparency and Disclosure Obligations

• The identity and contact of the lending bank/NBFC must be clearly displayed on the app.
• Loan terms, charges, and customer rights must be made visible before and after disbursal.
• Borrowers must be informed of all recovery agents or third parties interacting with them.

Opportunities for Fintechs:

Despite the compliance burden, the regulatory clarity opens up diverse opportunities:

• Bank/NBFC Partnerships: Banks and NBFCs, especially those with basic tech stacks, will seek compliant and modular Loan Service Providers to help digitize credit products.
• DLA as a Service: White-label compliant Digital Lending Apps with built-in KFS, consent management, and reporting features will become valuable B2B offerings.
• Risk Tech + DLG: Fintechs with underwriting capabilities can offer risk analytics bundled with limited DLG exposure to participate in portfolio upside.
• Data Science: Privacy-compliant alternative data models (e.g., transactional data, psychometrics) will be in demand for underwriting in a consent-governed scenario.
• Grievance & Compliance Tools: Software that helps banks/NBFCs and Loan Service Providers meet disclosure, grievance redressal, and audit trail obligations will see growing demand.

Challenges:

With greater opportunity comes greater compliance responsibilities:

• Unlicensed Lending Ban: Any Fintech continuing to lend directly without an NBFC license risks enforcement and delisting.
• DLG Non-Compliance: Misreporting or under-capitalizing DLGs can result in penal action or cancellation of partnership with banks/NBFCs.
• Data Misuse: Non-compliant access or storage of user data could lead to action under IT and RBI laws.
• Reputational Damage: Consumer-facing violations can lead to blacklisting of apps and public trust erosion.

Takeaway:

The RBI’s 2025 digital lending directions signal the end of the “Wild West” era of digital credit and usher in a new age of regulated growth, borrower protection, and accountability.

Fintechs that can pivot swiftly, institutionalize compliance, and build scalable partnerships with regulated entities will thrive in this evolving landscape. Those who ignore the mandate. risk losing not just market access—but also regulatory trust.

@AgilisOne

www.agilisone.com

Detailed RBI Directions : https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=12848&Mode=0