SECP Introduces Restrictions on Small Digital Loans

The Securities and Exchange Commission of Pakistan (SECP) has recently introduced significant restrictions on the regulations governing digital lending, particularly for small digital loans. These changes are aimed at ensuring better protection for borrowers and enhancing transparency within the digital lending sector. One of the key updates from the SECP is the reduction of the maximum amount for nano loans from Rs. 75,000 to Rs. 50,000. These loans can now be offered with a tenor of up to 90 days.

Additionally, the SECP has set a cumulative borrowing limit of Rs. 100,000 for individuals who may be borrowing from multiple digital lenders simultaneously. According to the newly issued circular, “The aggregate amount of nano-lending extended to a borrower by Non-Bank Financial Companies (NBFCs) shall not exceed Rs. 100,000 at any point in time.”

SECP Introduces Restrictions on Small Digital Loans

The SECP has also revised the market structure for digital lenders or NBFCs. One of the significant changes is the prohibition of compounding markup. This means that no additional markup will accrue on either the original markup or on late payment charges. Furthermore, an NBFC can rollover or restructure a loan, but the total period of the loan, including the original and rollover tenor, cannot exceed 90 days. NBFCs consider rollover restructuring as an extension of the existing loan and need to apply the same Annual Percentage Rate (APR) and terms as those of the original loan.

To prevent excessive charges, regulators have prohibited digital lenders from charging a Profit Rate (PR) exceeding 0.75% per day, with the APR capped at 74%. Additionally, the total recovery amount from a borrower, which includes interest, markup, profit rate, and all other applicable fees (such as processing, services, notarial, handling, and verification fees, as well as penalties for late payment and non-payment), cannot exceed the principal amount of the loan.

The disbursement of the entire principal amount must occur on the issue date of the loan. Borrowers are required to repay either in a lump sum at the loan’s maturity, in equal intervals during the loan period, or on an extended maturity date if the loan is rolled over. The profit amount should also be payable either in a lump sum on the maturity date or in equal intervals during the loan period.

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The SECP mandates that a clear prompt in both English and Urdu should appear whenever a user opens a nano-lending app or website. This prompt should inform users that digital loans are short-term with high interest rates and additional charges, emphasizing the risks of over-indebtedness and urging users to read the terms and conditions carefully.

Moreover, SECP requires digital loan providers to offer a calculator on their app or website homepage. This tool should allow users to evaluate the impact of costs, including processing fees, platform fees, PR, late payment charges, and other applicable charges, for different borrowing options.

The SECP also stated that digital loan providers must communicate any changes or updates to whitelisted apps to the Commission in advance. If the Commission does not respond within a specified period, consider the intimation acknowledged.

In recent months, the SECP has blocked over 130 loan apps, allowing only six digital lenders to continue operations. These include SmartQarza by Gold Lion Financial Pvt Ltd, Paisayaar by JingleCred Digital Finance Services Ltd, Barwaqt by Seedcred Financial Services Limited, Aitemaad by 4Sight Finance Services (Pvt) Limited, Hakeem by Walee Financial Services (Pvt) Limited, and Fauri Cash by Pakisnova Microfinance Company (Pvt) Limited.

These regulatory updates aim to enhance the safety and fairness of digital lending practices in Pakistan, ensuring that they protect and inform borrowers about their financial commitments.