RBI Guidelines For Transparency In Loan Products From Multiple Lenders

In April 2024, the Reserve Bank of India (RBI) released draft guidelines as a regulatory framework for the aggregation of loan products by lending service providers (LSPs). LSPs are third-party entities that perform some of the bank’s functions, such as customer acquisition, loan recovery, and more. These also include certain Regulated Entities (REs).

This RBI notification seeks to enhance transparency and fairness for borrowers, helping them make informed decisions. To know more about the latest RBI guidelines and directives, read on.

RBI’s Observations on Aggregation of Loans

On September 2, 2022, RBI issued Guidelines on Digital Lending. It reiterated that Regulated Entities who have entered into arrangements with an LSP have to conform to the guidelines of outsourcing. 

The focus of these guidelines was ‘customer centricity’ through the promotion of transparency. However, the RBI made the following observations about the current practices:

• Many lending service providers offer aggregation services for loans
• Here, many lending service providers or REs acting as LSPs have outsourcing arrangements with different lenders and Digital Lending App/ Platform (DLA)
• The LSPs match the borrower with one of these lenders/DLA
• In many of these cases where LSP has multiple arrangements with several lenders, the potential identity of the lender may not be revealed to the borrower

Advice to REs in the Draft Guidelines

After its monetary policy meeting in December 2023, the regulator indicated that it would lay down regulations for web aggregation of loan products. In the draft framework, RBI has advised LSPs/REs to follow practices to ensure that borrowers have prior knowledge about the lenders:

• The LSP must provide the borrower with a digital view of all its available loan offers from willing lenders as per their requirements
• In this process, RBI has provided flexibility to LSPs to adopt any mechanism to get the lender’s willingness to offer loans
• Lending services providers need to follow a consistent approach to ascertain the lender’s willingness, which they shall display on their website
• The digital view must allow the borrower to compare different loan offers
• They need to provide the name of the RE and details of the loan amount, tenure, interest rates, and other key information
• For each RE, the lending service providers also need to offer a Key Facts Statement (KFS)
• The content displayed needs to be unbiased and must not directly or indirectly promote a particular loan product
• LSPs also cannot use any deceptive practices or patterns, such as dark patterns that mislead the customer into choosing a particular product 

RBI issued these draft guidelines under the following acts: 

• Sections 21, 35A, and 56 of the Banking Regulation Act, 1949
• Sections 45JA, 45L, and 45M of the Reserve Bank of India Act, 1934 
• Sections 30A and 32 of the National Housing Bank Act, 1987 
• Section 6 of the Factoring Regulation Act, 2011

When effectively implemented, these regulations will have a long-term impact on customer protection and responsible lending. However, if one has any feedback, RBI has invited their comments on the draft circular for the regulatory framework for aggregation on loans in digital lending by May 31, 2024. 

To share views, all one has to do is send an e-mail with the subject: “Comments on Draft Circular on Digital Lending – Transparency in Aggregation of Loan Products from Multiple Lenders.”