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HIGH COURT OF DELHI
JUDGMENT
DHARANIDHAR KARIMOJJI ..... Petitioner
Through: Mr. Rahul Gupta, Mr. Rishav Ranjan & Ms. Alice Raj, Advocates.
Through: Mr. Chetan Sharma, Additional Solicitor General with Mr. Anurag Ahluwalia, CGSC and Mr. Amit Gupta, Advocate for Respondent
No.1/ UOI.
Mr. V. Giri, Senior Advocate with Mr. Ramesh Babu M.R., Ms. Manisha Singh & Ms. Nisha Sharma, Advocates for Respondent No.2/ RBI.
HON'BLE MR. JUSTICE SUBRAMONIUM PRASAD
1. The Petitioner before this Court has filed this present Petition in public interest under Article 226 of the Constitution of India stating that he Digitaaly holds a Bachelor of Technology Degree and is working as Freelancer in digital marketing.
2. The Petitioner has prayed for issuance of an appropriate writ or direction directing the Respondents to regulate and control working of online digital lenders doing the business of lending through Mobile Applications or any other platform, as well as restraining them from charging exorbitant interest on loan from borrowers, to restrain the lenders from harassing the borrowers and to save the borrowers from recovery agents and to fix the maximum interest of rate chargeable by online digital lenders.
3. A prayer has also been made to set up Grievance Redressal Mechanism for borrowers in every State/ Union of India.
4. The Petitioner, as stated by him, is working as a Freelancer in Digital Marketing, and his contention is that online lending platforms are offering loan to the needy people through online applications (Apps). It has been stated that there are 300 instant personal loan Apps in Play-Store, and loan to the tune of Rs. 1,500/- to 30,000/- for about 7 to 15 days is granted by such online lenders, and they deduct almost 35 to 45 per cent of loan money as platform fees/ service charges/ processing fees and transfer the remaining to the borrower‟s account. The Petitioner has further stated that the digital lending companies are charging exorbitant interest rate and other charges, and he has given details of various Apps which are charging interest at exorbitant rate.
5. The Petitioner has given an example of Cash Super App (Cashtrain) and he is stating that the lender is charging Rs. 1,190/- as interest for 7 days in respect of loan of 17,000/- for 7 days, processing fee of Rs. 4250/- and Digitaaly GST of Rs. 765/-, and for a Rs. 17,000/-, borrower is ultimately getting Rs.11,985/- in hand, and repayment amount is Rs. 18,190/-. Thus the total charges in respect of 17,000/- for 7 days is Rs. 6205/- i.e. 36.50% charges for 7 days or 1903% charges for a year.
6. The Petitioner has given examples of other Apps also and his contention is that in respect of other Applications also interest at exorbitant rate is being charged, and the lenders are harassing borrowers.
7. The Petitioner has stated that one particular company is having maximum lending Apps, and there is no control of Government of India over such foreign companies who are squeezing out the hard earned money of Indian Citizens.
8. The Petitioner has further stated that on Google Play Store, there are about 2,000 Apps and they give loan to borrowers for small amounts ( Rs. 500/- to Rs. 50,000/-). The Petitioner has raised a grievance that the maximum interest rate has not been fixed by Reserve Bank of India (RBI), State Governments or by the Government of India, and some of the Online Loan Companies are functioning as Non-Banking Finance Companies (NBFCs) regulated by RBI. However, the RBI has not fixed any CAP/ Ceiling in respect of rate of interest.
9. The Petitioner has further stated that the Kerala Government in 1958 has passed the Kerala Money Lenders Act and the Statute provides that no money lender shall charge interest on any loan at the rate exceeding 2% above the maximum rate of interest charged by commercial banks on loans granted by them. Digitaaly
10. It has been further stated that State of Uttar Pradesh in 1976 has again passed a similar statute i.e. Uttar Pradesh Regulation of Money-Lending Act, 1976.
11. The Petitioner has also given a reference to the Kerala Prohibition of Charging Exorbitant Interest Act, 2012 and the Maharashtra Money-Lending Regulation Act, 2014, and his contention is that in some of the States in respect of money lending, the rate of interest has been prescribed under the statute.
12. The Petitioner has further stated that the RBI on its website has clarified that a Non-Banking Financial Company – Micro Financial Institution (NBFC-MFI) can charge a differential rate of interest from its customers but the variance for individual loans between the maximum and the minimum rate of interest cannot exceed 4%.
13. The Petitioner has given various examples in respect of the Loan Apps, and his contention is that the RBI on 24.06.2020 has published a circular in respect of adherence to fair practice code and guidelines for loan sources by banks and NBFCs over digital lending platforms. However, the Circular does not have any guideline to cap interest rate, regulate or control digital lending, and guideline is applicable only to digital lending platforms working under NBFCs only. It has been stated that the digital lending platform does not disclose the name of their agents, and there are large number of incidents where the agents of foreign companies have misbehaved with the borrowers and used all kind of coercive methods to recover the loan amount.
14. It has also been stated that the foreign companies having offices outside India through various digital Applications are siphoning hard earned Digitaaly money of the Indian Citizens, and as per an article published in Businessstandard.Com on 21.09.2020, only one particular lending platform has disbursed loans to the tune of Rs. 1,200/- crores in the Financial Year 2021, and, therefore, regulation is required for all digital lending platforms in India keeping in view the volume of business.
15. The Petitioner has also given examples of certain incidents wherein the borrowers were harassed. Some persons have even committed suicides, and some have been forced to pay off their loans by using coercive means.
16. The Petitioner has also stated in the Writ Petition that large number of scams have also taken place in the country where the borrowers have been duped. He has given an example of a multi-crore loan app scam which took place in Hyderabad. The Petitioner has given links of some of the Apps of online lending platforms tested by the Petitioner.
17. The Petitioner has referred to a judgment delivered by Hon‟ble Supreme Court in the case of Francis Coralie Vs. Union Territory of Delhi, 1981 AIR 746: 1981 SCR (2) 516, and his contention is that the right to life includes the right to live with human dignity and all that goes along with it, namely, the bare necessaries of life such as adequate nutrition, clothing and shelter and facilities for reading, writing and expressing one-self in diverse forms, freely moving about and mixing and commingling with fellow human beings. His contention is that a citizen has got every right to live with dignity and harassment of citizens on account of the action of the lending platforms by charging exorbitant rate by humiliating the borrowers, forcing them to commit suicide is certainly violative of Article 21 of the Constitution of India. Digitaaly
18. Reliance has also been placed upon the judgment delivered in the case of Bandhua Mukti Morcha Vs. Union of India, 1984 AIR 802, 1984 SCR (2) 67. Again, it has been vehemently argued that right to live with human dignity is enshrined in Article 21 of the Constitution of India and the lending companies cannot be permitted to adopt various methods, to harass the borrowers in case of default in repaying loans. The borrowers cannot be subjected to exorbitant rate of interest, and cannot be harassed by recovery agents of online digital lending platforms.
19. The Petitioner in the Writ Petition has prayed for the following reliefs: “i. To Regulate and control working of Online Digital Lenders doing business through mobile App or any other platform; ii. To stop charging exorbitant interest on loan from borrowers; iii. To stop harassment to the borrowers from recovery agents of online digital lenders; iv. To fix maximum rate of interest chargeable by online digital lenders; v. To setup grievance redressal mechanism for borrowers in every state, to resolve the problems they face from online digital lending App operators or their agents, within specific time; ”
20. A counter-affidavit has been filed by the Respondent No.2/ RBI stating that the RBI is a statutory body constituted under Section 3 of the RBI Act to regulate the issuance of bank notes and keeping of reserves with a view to secure the monetary stability in the country and generally to operate the currency and credit system of the country to its advantage. It exercises various powers and discharges various statutory functions under the Banking Regulation Act, 1949 (BR Act), Reserve Bank of India Act, 1934 (RBI Act), Foreign Exchange Management Act, 1999 (FEMA), etc. Digitaaly The Reserve Bank acts as banker to the Government of India and State Governments and also as banker to the commercial banks in India. The Reserve Bank is also entrusted with the statutory obligation to regulate the activities of Non – Banking Financial Companies under Chapter III B of the RBI Act. Companies carrying out Non – Banking Financial Institutions (hereinafter referred to as “NBFI”) activity as principal business need to register themselves with the Reserve Bank as an NBFC. The Reserve Bank regulates such NBFCs on all aspects of regulation like prudential norms, business conduct and corporate governance, etc. regardless of their mode of delivery of the financial services i.e. whether the delivery channel for financial products/services are brick and mortar structure or digital platforms.
21. It has been further contended that by virtue of the Reserve Bank of India (Amendment) Act,1997 (Act 23 of 1997) Chapters IIIB, IIIC and Chapter V of the RBI Act, were amended empowering the RBI to regulate non-banking financial companies and non- banking institutions. The 1997 Act provided several safeguards for NBFCs so as to ensure their viability. These include compulsory registration of NBFCs with the RBI and the stipulation of minimum net-owned funds under Section 45IA; creation of reserve fund and requirement to transfer certain percentage of profit every year to the fund under Section 45IC; and prescription of liquidity requirements under Section 45IB. Further, the RBI has been vested with power to issue guidelines on encompassing aspects such as income recognition, accounting standards, provision for bad and doubtful debts, capital adequacy, etc. by incorporating Section 45JA in the RBI Act. The provisions are intended to ensure sound and healthy operation and the Digitaaly quality of assets of these companies. The RBI has been empowered to collect information from non-banking institutions as to deposits and to give directions under Section 45K and to call for information from financial institutions and to give directions under Section 45L of the RBI Act. Also, it has been empowered (i) to issue directions to the auditors of NBFCs and order for special audit of NBFCs (Section 45MA), (ii) to prohibit acceptance of deposits and alienation of assets by NBFCs (Section 45MB) and (iii) to make an application for winding up of NBFCs (Section 45MC) etc.
22. It has been further contended that Online lending platforms deployed by the banks/NBFCs for grant of loans can either be owned by them or availed by them under the outsourcing arrangement. Lending activities over digital platforms or Apps can also be undertaken by other entities regulated by the State Governments under statutory provisions, such as the money lending Acts of the concerned states. Lending activities undertaken by such other entities over a digital platform or otherwise are outside the direct regulatory purview of relevant statues under which RBI derives power to regulate and supervise such entities.
23. It has been further contended that that the financial institutions like Banks and NBFCs are bottom layers of lending business. They are the backbone of the entire ecosystem as they provide a major portion of the capital for lending. These players are traditionally large in numbers and are regulated by the Reserve Bank of India. It is further submitted that it is extremely vital for any lender to have a robust Loan Origination System (LOS) and Loan Management System (LMS). The LOS and LMS help to handle the origination and management of a loan by following principles that are designed to ensure the smooth running of the lending journey. These Digitaaly capabilities can be either built in-house or can be acquired with a third party. That is where the role of the fintech players comes into action.
24. It has been further contended that rapid developments in mobile and telecommunications technology have led to tremendous innovation and growth of fintech lending business in India. The Banks and NBFCs form partnerships with fintech players, which provide them access to various facilitation services including services in relation to customer on- boarding and know-your-customer (KYC) verification, credit risk analysis, loan disbursement, and loan recovery. Furthermore, these digital lenders offer completely digital financial services enabling the new age customer to avail loans in a matter of minutes.
25. It has also been contended that the Reserve Bank has been playing a catalytic role in permeation of FinTech into the economy, propelled by its Master Direction DNBR. PD. 008/03.10.119/2016-17 dated September 01, 2016 namely “Master Direction - Non-Banking Financial Company - Systemically Important Non-Deposit taking Company and Deposit taking Company (Reserve Bank) Directions, 2016 (hereinafter referred to as “Master Direction dated September 16, 2016”). The aforesaid direction while addressing the concern of harassment of borrowers by recovery agents, prescribes a Fair Practices Code (FPC) which provides that in case of recovery of loans, NBFCs shall not resort to undue harassment like persistently bothering the borrowers at odd hours, use muscle power, etc. Further, to deal with the issue of deregulated interest rates on loans, the extant Fair Practices Code guidelines provide that the Board of NBFCs shall adopt an interest rate model taking into account relevant factors and determine the rate of interest to be charged. Additionally, this master Digitaaly direction also contains outsourcing guidelines as per which outsourcing of any activity by NBFCs does not diminish their obligations and onus of compliance with regulatory instructions rests solely with NBFCs.
26. It is further submitted that the guidelines on the Fair Practices Code provided in Para 33 of Chapter VI of Master Direction dated September 1, 2016 (supra) provide that Board of NBFCs shall lay down the appropriate grievance redressal mechanism within the organization to ensure that disputes arising out of the decisions of lending institutions' functionaries are heard and disposed of at least at the next higher level. The Board shall conduct periodical review of the functioning of the grievances redressal mechanism at various levels of management. Further, NBFCs are required to display the following information prominently at the place of business:
(i) Name and contact details of Grievance Redressal Officer.
(ii) In case of non-resolution of complaint within a month, they can approach Regional Office of Department of Supervision of the Reserve Bank. Further, as stated in Para 3A of the aforesaid guidelines, NBFCs covered under „Ombudsman Scheme for Non-Banking Financial Companies, 2018‟ are required to appoint Nodal Officer/ Principal Nodal Officer.
27. It has been further contended that to provide redressal of complaints against NBFCs registered with the Bank, the „Ombudsman Scheme for Non- Banking Financial Companies, 2018‟ is already in place. The Scheme covers all deposit taking NBFCs and Non-Deposit taking NBFCs with asset size of ₹100 crore and above with customer interface for identified categories irrespective of mode of credit delivery. At present, four NBFC Ombudsman Digitaaly are in operation with their offices at Chennai, Kolkata, New Delhi and Mumbai. A grievance against NBFCs on grounds mentioned in the Scheme can be taken up with the Ombudsman in the respective zone. The Scheme also provides for an Appellate Authority mechanism to appeal against the decision of the Ombudsman.
28. It is further contended that with the emergence of various digital platforms in the financial sector claiming to offer hassle free loans, the Reserve Bank of India came up with its notification bearing no. DOR(NBFC)(PD)CC.No.112/03.10.001/2019-20 dated June 24, 2020 prescribing the guidelines on Loans Sourced by Banks and NBFCs over Digital Lending Platforms: Adherence to Fair Practices Code and Outsourcing Guidelines. The Banks and NBFCs were advised to take note that the outsourcing of any activity by them does not diminish their obligations, as the onus of compliance with regulatory instructions rests solely with them. They were mandated to abide by following guidelines before engaging digital lending platforms as their agents to source borrowers and/ or to recover dues:
29. It has been further contended that the RBI, in order to caution the borrowers from falling prey to unauthorised Digital Lending Platforms/Mobile Apps, vide a Press Release dated December 23, 2020 requested the public to verify the antecedents of the company/ firm offering loans online or through mobile apps. Moreover, the borrowers were requested not to share copies of KYC documents with unidentified persons, unverified/unauthorised Apps and should report such Apps/Bank Account information associated with the Apps to concerned law enforcement agencies or use Sachet portal of Reserve Bank (https://sachet.rbi.org.in) to file an on-line complaint. The RBI urged the members of Public to avail only the lending activities by Banks, Non-Banking Financial Companies (NBFCs) registered with RBI and other entities which are regulated by the State Government(s) under statutory provisions, such as the Money Lending Act of the concerned state.
30. It is further contended that the Reserve Bank of India vide a Press Release dated January 13, 2021 has notified that it had set up an interregulatory Working Group on digital lending including lending through Digitaaly online platforms and mobile apps to look into the granular aspects of FinTech and its implications so as to review and reorient appropriately the regulatory Framework and respond to the dynamics of the rapidly evolving FinTech scenario. The Group has been advised to submit its report within three months. The six-member working group has been formed to study digital lending in regulated as well as unregulated financial sector to devise a regulatory Framework for the same. The working group consists of four internal and two external members. The internal members include Jayant Kumar Dash, Executive Director, RBI; Ajay Kumar Choudhary, Chief General Manager-in-Charge, Department of Supervision, RBI; P Vasudevan, Chief General Manager, Department of Payment and Settlement Systems, RBI; Manoranjan Mishra, Chief General Manager, Department of Regulation, RBI. The external members include Shri Vikram Mehta, former associate of Monexo Fintech and Shri Rahul Sasi, Cyber Security Expert & Founder of Cloud SEK.
31. It has also been contended further that as regards the Digital Lending Platforms are concerned, those which are owned by the Banks or the NBFCs are controlled and regulated by them. Besides there are number of online lending platforms which are neither authorized nor managed by either of the two. The RBI being the apex bank of the country has always vigilantly come up with apt guidelines to keep a strict eye on the unauthorized digital lending platforms.
32. The RBI has subsequently filed another affidavit/ additional affidavit on 19.08.2021 to inform the developments with respect to Working Group on Digital Lending including lending through Online Platforms and Mobile Apps appointed by the RBI. Digitaaly
33. It has been stated that the Working Group was constituted on 13.01.2021 to study all aspects of digital lending activities in the financial sector as well as by unregulated players so that an appropriate regulatory approach can be put in place. The Group has received various comments from various stakeholders, and at that point of time it was stated that the group is examining the matter.
34. The RBI finally has filed a supplementary affidavit and has stated that the Working Group on digital lending including lending through online platforms and mobile apps constituted on 13.01.2021 has submitted recommendations on 18.11.2021. The following recommendations were submitted by the Working Group. i. “Subjecting the Digital Lending Apps to a verification process by a nodal agency to be setup in consultation with stakeholders. ii. Setting up of a Self-Regulatory Organisation (SRO) covering the participants in the digital lending ecosystem. iii. A separate legislation to prevent illegal digital lending activities. iv. Development of certain baseline technology standards and compliance with those standards as a pre-condition for offering digital lending solutions. v. Disbursement of loans directly into the bank accounts of borrowers; disbursement and servicing of loans only through bank accounts of the digital lenders. vi. Data collection with prior and explicit consent of borrowers with ve4rfifable audit trails. vii.All data to be stored in servers located in India. viii. Algorithmic features used in digital lending to be documented to ensure necessary transparency. ix. Each digital lender to provide a key fact statement in a standardised format including the Annual Percentage Rate. Digitaaly x. Use of unsolicited commercial communications for digital loans to be governed by a Code of Conduct to be put in place by the proposed SRO. xi. Maintenance of a „negative list‟ of Lending Service Providers by the proposed SRO. xii. Standardised code of conduct for recovery to be framed by the proposed SRO in consultation with RBI.”
35. The additional affidavits further reveal that the report of the Working Group was released/ uploaded on the website of the RBI and a Press Release was also issued on 18.11.2021 informing comments/ suggestion of various stakeholders as well as from public at large to be submitted on 31.12.2021.
36. The Union of India has also filed a reply in the matter and the Union of India has dealt with powers of RBI under the Reserve Bank of India Act, 1934, Banking Regulation Act, 1949, the Foreign Exchange Management Act, 1999, and the Payment and Settlement Systems Act, 2007. It has been stated by the Union of India that the RBI as the regulatory and supervisory of Banks/ NBFCs, and payment and settlement systems, is having all power and functions to regulate the online platform/ NBFCs and other financial institutions which are subject matter of the present Writ Petition and it has been stated in the reply that the RBI has constituted a Working Group on digital lending, including lending through online platforms and mobile applications, and the RBI shall be taking appropriate actions in accordance with law in the matter.
37. This Court, as the Working Group has been constituted by the Reserve Bank of India, has directed the RBI from time to time to submit various status reports and a status report was filed on 20.06.2022, and finally a status report was filed on 31.08.2022. Digitaaly
38. In the last status report, it has been stated that after taking into account the inputs from diverse set of stakeholders, a regulatory Framework to support the orderly growth of credit delivery through digital lending methods while mitigating the regulatory concerns has been framed and the RBI has come out with the regulatory Framework vide a Press Release dated 10.08.2022 (hereinafter referred to as “Framework”). The RBI has directed immediate implementation of the regulations as prescribed and Annexure 1 of the said Framework dated 10.08.2022 is required to be mandatorily followed by the Regulated Entities and lending service providers. The Regulated Framework is expected to address the concerns relating to unbridled engagement of third parties, mis-selling, breach of date privacy, customer grievance redressal, unfair business conduct, and unethical recovery practices.
39. The affidavit further reveals that as per the recommendation of the committee and as adopted by Reserve Bank of India, the digital lenders have been classified into three groups which are as follows: “a. Entities regulated by the RBI and permitted to carry out lending business; b. Entities authorised to carry out lending as per other statutory/ regulatory provisions but not regulated by RBI; c. Entities lending outside the purview of any statutory/ regulatory provisions.”
40. The Framework dated 10.08.2022 is focused on digital lending mechanism of RBI-regulated entities and lending service providers engaged by them to extend various permissible credit facilitation services. The RBI by way of Framework dated 10.08.2022 has placed regulations in place and Digitaaly the key points of the Framework implemented by the RBI are reproduced as under:
Digitaaly i. Data collected by DLAs should be need based, should have clear audit trails and should be only done with prior explicit consent of the borrower. ii. Option may be provided for borrowers to accept or deny consent for use of specific data, including option to revoke previously granted consent, besides option to delete the data collected from borrowers by the DLAs/ LSPs.
41. Annexure 1 to the recommendations of the Working Group on digital lending implementation reveals that the RBI has accepted most of the recommendations of the Committee, and, therefore, it can never be said that an unregulated mechanism is in place in respect of digital lending platforms. Annexure 1 deals with suggestions received on recommendations accepted for immediate implementation. Annexure 2 deals with recommendations accepted in principle which requires further implementation, and annexure 3 deals with recommendation for consideration of Government of India.
42. Learned Counsel for Government of India, at this stage, was fair enough in stating before this Court that in respect of the recommendations made by RBI, the Government of India shall be taking appropriate decisions in accordance with law within a reasonable time.
43. In the considered opinion of this Court, once the RBI has acted upon the report of Working Group on digital lending including lending through Digitaaly online platforms and mobile Apps, and has accepted the report and has also issued its implementation vide Framework dated 10.08.2022, no further orders are required to be passed in the present PIL.
44. However, the Reserve Bank of India and the Government of India shall ensure strict compliance of the regulatory Framework released vide Press Release dated 10.08.2022, and in respect of recommendations which are for consideration for the Government of India, the Government of India will take immediate steps at an early date in accordance with law.
45. With the aforesaid, the present PIL stands disposed of. (SATISH CHANDRA SHARMA)
CHIEF JUSTICE
JUDGE JANUARY 23, 2023 Digitaaly