Allahabad High Court examines OTP validity for loan consent
India's Allahabad High Court is reviewing whether a one-time password (OTP) constitutes valid consent for a loan. The court has asked the Reserve Bank of India (RBI) for guidance following a case where a borrower's father's credit score was negatively impacted.
The Allahabad High Court in India is set to examine the validity of obtaining loan consent through one-time passwords (OTPs) and web links. The court initiated the review in a case where a student's father experienced a significant drop in his credit score after the student accepted an education loan via an OTP.
The court indicated that the common practice of service providers contacting individuals based on online searches and then securing loan consent through OTPs or web links requires scrutiny. "Since the matter is relating to such activities, which are existing in the public domain and affects the public at large, and it is an open truth that service providers often make calls and send text messages to those who have searched certain online content and take consent online through OTPs or by sharing web links, therefore, we are of the prima-facie opinion that such an issue needs to be addressed vis-a-vis the merits of the matter," stated the bench in its order dated September 16.
The case involves a student who, after searching for study abroad options, was approached by an online platform offering to arrange funds. She accepted a loan through web links and an OTP from a non-banking financial company. However, she did not secure admission and sought to cancel the loan. The platform deducted consultancy charges, but the loan remained active. When loan installments were to be debited from her father's salary account, he stopped payments. This led to the loan's eventual cancellation and a reported severe decline in his credit score from 900 to 681, impacting his ability to secure future loans for his daughter's education.
The Reserve Bank of India (RBI) has established guidelines for digital lending, requiring lenders to provide clear information about loan terms, annual percentage rates, fees, and repayment schedules before a borrower agrees. Borrowers also have a cooling-off period to exit a loan without penalty. New regulations effective January 1, 2027, aim to clarify what constitutes valid consent via OTP and prevent deceptive practices by lenders in their digital interfaces.
The Allahabad High Court is scheduled to hear the case further on October 13. The outcome could set a significant precedent for the enforceability of digital loan agreements and consumer protection in India.