Following several complaints of malpractice against such apps, the Reserve Bank of India issued detailed guidelines on Wednesday that will increase scrutiny and supervision.
The central bank said only regulated entities such as banks and shadow banks will be able to disburse and collect loan repayments.
All loan disbursements and repayments must be done between the borrower and the regulated entity without using passthrough or pool accounts.
It added that lenders would now be responsible for paying the fees to the apps, not borrowers.
Concerns over data collection were also addressed by the central bank.
As part of the RBI guidelines, DLAs (digital lending apps) should only collect data that is needed, have clear audit trails, and have borrower consent.
Also, it prohibited automatic credit limit increases without the borrower's explicit consent and outlined the need to clearly communicate interest rates and other charges.
After serious concerns were raised by borrowers' malpractices, the central bank formed a committee to formulate norms on digital lending.