The Reserve Bank of India (RBI) released draft guidelines for ‘Digital Lending — Transparency in Aggregation of Loan Products from Multiple Lenders', on April 26 to ensure transparency in digital lending practices.
The guidelines urge lending service providers (LSPs) to offer a clear digital view of loans provided to customers in partnership with other entities.
The public can send comments by e-mail with the subject line "Comments on Draft Circular on Digital Lending – Transparency in Aggregation of Loan Products from Multiple Lenders", by May 31, 2024, RBI informed.
As an introduction to the new draft guidelines, RBI said that the identity of a potential lender may be unknown to a borrower in cases where an LSP has arrangements with multiple lenders.
The Reserve Bank of India (RBI) has recently noted that several Loan Service Providers (LSPs) who offer aggregation services for loan products have entered into outsourcing arrangements with multiple lenders.
An LSP is an agent of a regulated entity (RE) who performs one or more of the lender's functions or a part of those functions such as customer acquisition, underwriting support, pricing support, servicing, monitoring, and recovery of specific loan or loan portfolio on behalf of REs in compliance with the current outsourcing guidelines.
New Draft Guidelines
RBI mandated that due to the above reason, a digital view should be included, that includes a host of details of lenders to ensure that customers have prior information about potential lenders to help them make an informed decision on a loan product.
LSPs are required to have a digital view that discloses essential details such as the names of the regulated entities (REs) extending loan offers, loan amount, tenure of the loan, Annual Percentage Rates (APR), and other key terms and conditions. This digital view empowers borrowers to make informed decisions by ensuring fair comparisons between different loan offers. A link to the key facts statement (KFS) shall also be provided in respect of each of the REs.
Additionally, the draft guidelines emphasise that the content displayed by LSPs must be unbiased and shall not directly/indirectly promote or push a product of a particular RE, including by use of any practices or deceptive patterns. They must not employ 'dark patterns' to mislead borrowers into choosing a particular loan.
This initiative aligns with the statement on Developmental and Regulatory Policies issued by RBI in December last year, in which it announced constituting a regulatory framework for Web Aggregators of Loan products (WALP) to bring transparency and neutrality. The central bank then underscored that connected lending or lending to persons who can control or influence the decision of a lender can be of concern if the lender doesn't maintain arm's length with the borrower. It can create morally hazardous issues that can compromise pricing decisions and credit management.
RBI's earlier guidelines on Digital Lending state that any fees or charges payable to LSPs should be paid directly by the REs, without passing them on to borrowers. Further, penal interest or charges must be based on the outstanding loan amount and transparently disclosed upfront on an annual basis to borrowers in the Key Fact Statement (KFS).
