On Friday, The Reserve Bank of India (RBI) published preliminary guidelines for a regulatory framework governing the consolidation of loan products by lending service providers (LSPs). This was done in order to increase transparency and provide borrowers with advance knowledge about potential lenders.
LSPs are independent entities that banks or non-banking finance companies (NBFCs) employ to carry out certain functions, such as customer acquisition, underwriting, and loan recovery, on digital platforms. In certain cases, a regulated entity may also act as an LSP. The RBI has instructed banks and NBFCs to ensure that their LSPs offer a “digital view” of all available loan offers from willing lenders with whom the LSP has agreements.
This digital view, according to the RBI, should include the name of the bank or NBFC offering the loan, the loan amount and duration, the annual percentage rate, and other important terms and conditions, in order to enable borrowers to make a fair comparison between various offers.
The central bank has announced that after the December 2023 monetary policy meeting, it will establish a regulatory framework for web aggregation of loan products. This move comes after the RBI noted concerns about loan products that may harm the interests of customers. In August-September 2022, the RBI introduced a regulatory framework for digital lending. “The digital lending ecosystem also includes services that consolidate loan offers from lenders (known as web aggregation of loan products) for the benefit of customers,” stated a spokesperson for the RBI.
The RBI has stated that LSPs may use any method to determine the willingness of lenders to provide a loan. LSPs must follow a “consistent approach” that is clearly disclosed on their website. In addition, a link to the key facts statement (KFS) must be provided for each regulated entity. The content displayed by LSPs must be impartial and must not directly or indirectly promote or push a certain lender’s product, including through the use of deceptive practices or patterns, in order to mislead borrowers into selecting a particular loan offer, according to the central bank. The RBI has requested feedback from stakeholders on the draft circular by May 31.
“As the RBI prepares to implement a new regulatory framework for web aggregators of loan products, it is essential for stakeholders to comprehend the implications for compliance and operational transparency. These guidelines are not just procedural but crucial in shaping a stronger and more transparent digital lending landscape. They promise to improve consumer protection and establish clearer accountability for financial entities, ensuring that digital platforms adhere to national standards of financial integrity and consumer trust,” said Nilesh Tribhuvann, Managing Partner at White & Brief – Advocates & Solicitors.
