Reserve Bank of India (Digital Lending) Directions, 2025
Background
The Reserve Bank of India ("RBI") recently issued the Reserve Bank of India (Digital Lending) Directions, 2025 ("Digital Lending Directions 2025") which seeks to consolidate various prior frameworks on digital lending in India.
The Digital Lending Directions has superseded and unified the following frameworks:
- Loans Sourced by Banks and NBFCs over Digital Lending Platforms:
- Guidelines on Digital Lending, 2022 ("Digital Lending Guidelines 2022"); and
- Guidelines on Default Loss Guarantee in Digital Lending, 2023.
Key Changes of the Digital Lending Directions 2025
The key changes introduced via the Digital Lending Directions 2025 are as below.
- Regulated Entities:
The entities regulated by the Digital Lending Directions 2025 are ("RE"): (i) all commercial banks; (ii) all cooperative banks – Primary (urban), State and Central Cooperative Banks; (iii) all Non-Banking Finance Companies ("NBFCs"), including Housing Finance Companies; and (iv) All India Financial Institutions ("AIFIs"). AIFIs have been recently covered under the Digital Lending Directions 2025.
- Lending Service Providers:
- This is a new category of entities, defined under the Digital Lending Directions 2025 as "as agent of a Regulated Entity (including another Regulated Entity) who carries out one or more of the Regulated Entity's functions, or part thereof, in customer acquisition services incidental to underwriting and pricing, servicing, monitoring, recovery of specific loan or loan portfolio on behalf on the Regulated Entity in conformity with extant outsourcing guidelines issued by the Reserve Bank" ("LSP").
- Certain obligations are imposed on REs with respect to their
use of LSPs in various commercial activities.
- REs can engage LSPs only after entering into an agreement with the latter, with clearly defined roles and responsibilities between both parties.
- Irrespective of the agreement between an RE and an LSP, the RE shall bear the overarching responsibility for all activities of an LSP undertaken at its behest.
- REs are required to assess the LSPs technical capabilities, data privacy policies and storage systems, fairness in recovery processes and their compliance with applicable regulations before entering into agreements with LSPs. These metrics of assessment of LSPs
- REs are required to follow extant guidelines on supervising LSPs acting as recovery agents and other guidelines on outsourcing financial services to LSPs.1
- REs are also required to ensure that the LSPs following the guidelines on arrangements with multiple lenders as provided in the Digital Lending Directions 2025
- Consumer Protection Requirements.
- REs are mandated to only provide loans to borrowers with appropriate credit worthiness and not automatically increase credit limits without prior request.
- Key Disclosures:
- REs are required to provide disclosures to borrowers on the loan extended in the form of Key Facts Statements ("KFS"), which should be contain all the important details pertaining to the loan that allow the borrower to make an informed decision prior to taking the loan. The KFS should be provided in a manner as directed by the RBI from time to time.2
- Penal charges imposed by REs for inculcating credit discipline amongst the borrowers should be clearly displayed in the KFS and can be charged only in accordance with the policies issued by the RBI.3
- RE s are required to disclose, updated information on a website maintained by them, pertaining to: (1) details of all their digital lending products and digital lending apps ("DLAs"); (2) details of the LSPs engaged, DLAs and the services provided by each of them; (3) details of the RE's customer care, grievance redressal mechanism along with a link to RBI's complaint management system ("CMS") and Sachet Portal; (4) privacy policies of the RE with respect to the borrower's data; (5) details of a recovery agent, when they will be appointed, the practices they can follow etc.
- Cooling-off Period: Also called a "look-up" period, is a vital mechanism that allows borrowers to make informed decisions regarding their necessity for a digital loan, has been revised. The earlier Digital Lending Guidelines 2022 had a look-up period of 3 days for loans of a tenure greater then 7 days and 1 day for loans of a shorter duration. The Digital Lending Directions 2025 have allowed more flexibility to REs for determining the cooling-off period, where the minimum duration for a cooling-off period that can be imposed on any loan is 1 day and the board of the RE is enabled to set longer cooling-off periods as it deems necessary.
- Grievance Redressal mechanism: The RE and LSP with interface to borrowers are required to designate nodal grievance redressal officers to dealing with digital lending complaints and their details are to be prominently displayed on DLA and RE's website. Borrowers should be given the opportunity to raise complaints directly on the DLA and/or the RE's website, which should be addressed within 30 days of receipt of the complaint by the RE. Failure to redress the complaint or a rejection of the complaint by the RE can entitle the borrower to approach the RBI's Reserve Bank-Integrated Ombudsman Scheme ("RB-IOS") via RBI's CMS portal or by physically lodging a complaint with the RBI.
- Data use, storage and privacy:
- REs and LSPs engaged by REs are required to have robust privacy policies that should be compliant with applicable laws and prominently displayed on the website of the RE, LSP and any DLAs used by either entity to onboard borrowers. The RE, LSPs shall also ensure that they use the best technology for precluding any cybersecurity threats from the use of the DLA and/or the website by borrowers.
- RE and LSPs can access data of the borrowers only for the purpose of onboarding or undertaking KYC requirements for the borrowers. Such data can be accessed only with the explicit consent of the borrower and used only for the limited purpose for which the data is purported to be collected.
- RE and LSPs shall not store more than the basic data of the borrower, including not storing any biometric data of the borrower, for processing their loan requests. They should also give the borrower the option for having the RE, LSP and any interface they use to connect with the borrowers, such as DLA and/or website, for forgetting personal information that may be stored on these interfaces and that are on the records of the RE and LSP.
- Digital Lending Apps:
- RE s are required to report and list all the DLAs that are deployed or joined by them (via an LSP), on RBI's central information management system ("CIMS") platform. The details of the DLAs used, including those ceasing to be used or newly deployed or joined DLAs should be updated from time to time on the CIMS platform.
- The RE should appoint a chief compliance officer who is required to certify that all the information submitted regarding the DLAs that they have deployed or joined, on the CIMS platform, is correct. Such information would include: (1) DLA's link to RE's website, (2) DLAs appointment of a suitable nodal/grievance redressal officer for addressing borrower complaints, (3) maintenance of adequate data protection and privacy policies by DLAs when accessing and storing borrowers' personal data and others.
- Default Loss Guarantee:
- REs can enter into Default Loss Guarantee ("DLG") arrangements only with LSPs and other REs, who should be incorporated as a company under the Companies Act 2013. DLG is where the guarantor can take on a percentage of the loss that accrues to a RE from issuance of a loans to borrowers.
- DLG Cap and Restrictions:
- The cap on DLG that can be provided by an LSP or RE undertaking such services is 5% of the total amount disbursed from a loan portfolio at any given time. For implicit guarantee arrangements, the DLF cover cannot exceed more than an amount equivalent to 5% of the underlying loan portfolio.
- The portfolio over which DLG cover can be offered is also required to be: (1) fixed portfolio; and (2) only identifiable and measurable loan assets that have been sanctioned.
- DLG cover cannot be provided for revolving credit facilities,4 loans covered by credit guarantee schemes administered by trust funds5 and loans issued by NBFCs on peer-to-peer lending platforms.6
- DLG Provider:
- The RE is required to develop a robust policy for appointment of a DLG Provider, and include details such as minimum eligibility criteria for the DLG Provider, nature and extent of DLG cover, process of monitoring and reviewing the DLG arrangement and the fees payable to the DLG provider, that the DLG provider has the capacity to provide the DLG cover etc. This policy should be reviewed periodically.
- The DLG can be provided in the following ways, which is the same as before: (1) cash deposit with RE; (2) fixed deposit maintained with a scheduled commercial bank in favour of RE; and bank guarantee in favour of RE.
- If DLG provider is a RE, then the total DLG cover provided, which is outstanding, shall be deducted from its capital. The credit risk mitigation benefits on individual loan assets in the portfolio and computation of capital exposure are required to be undertaken based on existing norms.7
SEBI's ESG Bond Framework: A Structured Step Towards Sustainable Finance
Background
India's engagement with sustainable finance began formally in 2017 when the Securities Exchange Board of India ("SEBI") issued a circular dated 30 May 2017, outlining the disclosure requirements for issuance and listing of green debt securities in India which has further been amended and revised by SEBI vide its circular dated 6 February 2023. A green debt security is a type of security issued to raise funds for projects and/ or assets falling under certain categories like renewable energy, sustainable waste management, biodiversity conservation, circular economy adapted products etc.
On 30 September 2024, SEBI, in its board meeting, approved a proposal to specify the frameworks for the issuance of social bonds, sustainability bonds and sustainability-linked bonds, which together with green debt securities, will be termed as Environment, Social and Governance Debt Securities (the "ESG Debt Securities"). Pursuant to the amendment of the SEBI (Issue and Listing of Non-Convertible Securities) Regulations, 2021 (the "NCS Regulations") dated 11 December 2024, which introduced Regulation 12 A for issuance of ESG Debt Securities, SEBI vide its circular dated 5 June 2025, introduced the Framework for Environment, Social and Governance (ESG) Debt Securities (other than green debt securities) (the "Framework"). This Framework is intended to facilitate the raising of funds by issuersthrough the issuance of such securities.
Introduction
ESG Debt Securities are defined under Regulation 2(1) (oa) of the NCS Regulations as:
"ESG Debt Securities means green debt securities, social bonds, sustainability bonds, sustainability-linked bonds, or any other type of bonds, by whatever name called, that are issued in accordance with such international frameworks as adapted or adjusted to suit Indian requirements that are specified by the Board from time to time, and any other securities as specified by the Board."
The definition is inclusive in the sense that it permits inclusion of any other kind of bond that aligns with the requirements laid down under such international frameworks as specified by SEBI.
The Framework introduces a structured set of regulatory requirements for the issuance of ESG Debt Securities in India, excluding green debt securities (which are governed under a separate set of disclosure requirements issued by SEBI). The Framework covers three categories of instruments: (i) Social Bonds, (ii) Sustainability Bonds and (iii) Sustainability-Linked Bonds which are listed or proposed to be listed on a recognized stock exchange. The requirements under the Framework shall be in addition to the requirements specified in the NCS Regulations and the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015.
Key Highlights of the Framework
1. Definitions of the securities covered under the Framework
The Framework defines each type of ESG Debt Security distinctly:
- Social Bonds:
Debt instruments whose proceeds are exclusively utilized for social projects that directly aim to address a specific social issue and/or seek to achieve positive social outcomes that fall under the categories stated in the Framework such as, affordable housing and basic infrastructure, food security, healthcare, education, employment generation, etc. - Sustainability Bonds:
Debt instruments whose proceeds are exclusively utilized to finance or re-finance a combination of eligible green project(s) and social project(s) as specified under the definition of green bonds and social bonds respectively. While the existing green debtsecurities framework under SEBI still applies to the environmental component, the new Framework ensures that social allocations meet the same rigor as those in pure social bonds. - Sustainability-Linked Bonds:
Unlike the above two categories, Sustainability-Linked Bonds are not tied to specific project use. Instead, it has its financial and/or structural characteristics linked to predefined sustainability objectives of the issuer. Subject to the condition that such objectives are measured through predefined 'Sustainability Key Performance Indicators' (i.e. quantifiable metrics used to measure the performance of selected indicators) ("KPIs") and assessed against predefined 'Sustainability Performance Targets' (i.e. measurable improvements in KPIs on to which issuers commit with a predefined timeline) ("SPTs").
2. Alignment with International Standards
The Framework mandates that the issuer must ensure their bonds fall under the definitions as stated above or comply with at least one of the following widely accepted standards:
- International Capital Market Association Principles / Guidelines;
- Climate Bonds Standard;
- Association of Southeast Asian Nations Standards;
- European Union Standards; and
- Any framework or methodology specified by any financial sector regulator in India.
3. Pre issue requirements and continuous disclosure requirements
A key innovation in the Framework is the mandatory set of pre-issuance disclosures and set of continuous disclosures post-listing of the ESG Debt security.
For Social and Sustainability Bonds:
Under pre issue requirements, the issuers must clearly outline the project's objectives, the details of the target population and the benefits from the project. The issuer must also explain their internal project selection process, including governance structures, screening criteria and any impact assessments used. Issuers must also identify the tools and systems they will use to ensure proper use of proceeds— whether internal controls, audit mechanisms or third-party oversight.
The Framework also mandates annual reporting on how the proceeds are used. This includes amounts allocated, details of funded projects and consistency with the original disclosures. If any proceeds remain unutilized, issuers must explain why, how they are being held and when they will be deployed.
For Sustainability-Linked Bonds:
The emphasis shifts to performance in Sustainability-Linked Bonds. Issuers must disclose their sustainability strategy, relevant KPIs and SPTs. These must be material, time-bound and clearly aligned with business goals. The Framework mandates that annual
performance against KPIs and SPTs post the issuance of the Sustainability-Linked Bonds. This is the true test of the bond's credibility. If targets are missed, the bond's structure may trigger financial penalties, such as a step-up in coupon rates.
4. Third party assurance
The Framework of SEBI on ESG Debt Securities, mandates independent third-party reviews both before and after bond issuance to prevent greenwashing and ensure credible ESG claims.
Before issuance, the independent third-party reviewers assess alignment with global standards, verify the use of proceeds, governance and tracking systems and evaluate the relevance and ambition of KPIs and SPTs, especially for Sustainability-Linked Bonds.
After issuance, the independent, third party reviewers verify fund deployment, impact disclosures and whether targets were met, using methods like audits and staff interviews.
Conclusion: Key takeaways and challenges of the Framework
The Framework marks a strategic turning point in India's financial ecosystem, positioning ESG Debt Securities as a credible vehicle for sustainable financing. Following are the key takeaways and challenges from the Framework:
- Benefits for Issuers and Investors:
The Framework provides issuers with a standardized, credible way to raise funds for social and environmental initiatives, aligning with global disclosure norms. This enhances their market reputation and helps attract ESGfocused investors, especially valuable for issuers seeking to scale internationally. Public sector projects such as affordable housing, rural healthcare and education can also benefit by accessing social bond markets with increased investor trust due to the Framework's transparency. For investors, SEBI's rules reduce uncertainty and increase comparability. Rigorous disclosures and mandatory third-party reviews help them better assess risks and impacts. Investors are more likely to participate, knowing that the ESG claims are backed by verifiable data. - Prevention of Purpose-washing:
The Framework plays a crucial role in preventing purposewashing (i.e. making false, misleading, unsubstantiated or otherwise incomplete claims about the purpose for which bonds are issued) by mandating clear disclosures on the use of proceeds, alignment with established global principles, independent third-party reviews and requiring issuers to justify ESG claims with measurable impact metrics. - Concerns around Third-Party Reviewers:
While the Framework mandates external third-party reviews to validate the ESG credentials of bonds, there is currently no uniform accreditation or oversight mechanism for such reviewers. This raises concerns about the consistency, independence and objectivity of assessments, potentially shifting the risk of purpose-washing to the review process itself. - Issuer Readiness and Data Gaps:
Many Indian firms, especially small and medium enterprises, lack the expertise and data systems needed to comply with the Framework. Capacity-building and better data infrastructure are essential for accurate reporting and project validation.
Footnotes
1. https://rbi.org.in/Scripts/NotificationUser.aspx?Id=12378&Mode=0 and its attendant amendments.
2. https://rbi.org.in/Scripts/NotificationUser.aspx?Id=12663&Mode=0
3. https://rbi.org.in/Scripts/NotificationUser.aspx?Id=12527&Mode=0
4. https://rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=12300
5. https://rbi.org.in/Scripts/NotificationUser.aspx?Id=12384&Mode=0
6 https://rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=11137
7. https://rbi.org.in/Scripts/BS_ViewMasCirculardetails.aspx?id=12815
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