The Reserve Bank of India (RBI) has proposed new norms for lending service providers (LSPs) to promote transparency in loan offers. LSPs, acting as agents of banks, will be required to give information on all the loan offers available with them to borrowers, allowing them to make an informed decision. Many of the LSPs offer aggregation services for loan products.
LSPs are agents of regulated entities (REs) who carry out some or all of the lender’s functions in customer acquisition, underwriting support, pricing support, servicing, monitoring, and recovery of specific loan or loan portfolios on behalf of REs. These activities are performed in accordance with outsourcing guidelines.
In December last year, the RBI announced a draft framework that raised concerns about connected lending or lending to individuals who can control or influence a lender’s decision. The RBI emphasized on maintaining an arm’s length relationship with such borrowers to avoid moral hazard and compromise in pricing and credit management.
The draft circular on ‘Digital Lending – Transparency in Aggregation of Loan Products from Multiple Lenders’ states that in cases where an LSP has arrangements with multiple lenders, the potential lender’s identity may not be known upfront to the borrower. To address this issue, the RBI proposes that LSPs provide a digital view of all the loan offers available to the borrowers, according to their requirements and from all willing lenders they have arrangements with.
The RBI wants LSPs to adopt a consistent approach to ascertain lenders’ willingness to offer a loan, which should be disclosed on their website. The digital view should include the names of the REs extending the loan offer, the loan amount and tenor, the annual percentage rate (APR), and other key terms and conditions. This will enable borrowers to make fair comparisons between different loan offers.
Stakeholders have until May 31 to provide their comments on the draft circular. The RBI had previously issued guidelines on digital lending in September 2022, with a focus on customer centricity and ensuring transparency in the credit intermediation process.
