RBI proposes 'digital-view' of loans to ensure transparency to borrowers

The Reserve Bank of India (RBI) has come out with draft guidelines for ‘Digital Lending — Transparency in Aggregation of Loan Products from Multiple Lenders.’

This is to ensure that lending service providers (LSPs) provide a digital view of the loans they offer to customers in partnership with other entities. It is set to bring in the much-needed transparency in the system.

The banking regulator, in a draft circular on digital lending, said the identity of a potential lender may not be known to a borrower in cases where an LSP has arrangements with multiple lenders.

This comes on the back of the RBI’s observation that many LSPs offering aggregation services for loan products have outsourcing arrangements to multiple lenders.

A digital view will provide a host of details to ensure that customers have prior information about potential lenders to make an informed decision on a loan product.

These details will include names of the regulated entities (REs) extending the loan offer, amount and tenor of loan, the annual percentage rate (APR) and other key terms and conditions. These enable a borrower to make a fair comparison between various offers.

“A link to the key facts statement (KFS) will also be provided in respect of each RE,” the regulator said in its draft guidelines.

The RBI said that the content displayed by LSPs should be unbiased and not promote products of a particular RE.

They should not use any deceptive practices such as dark patterns that mislead borrowers into choosing a particular loan.

RBI has sought public comments on this draft circular by May 31, 2024.

In a statement on Developmental and Regulatory Policies issued in December last year, the RBI said that it would constitute a regulatory framework for Web Aggregators of Loan products (WALP) to bring transparency and neutrality in the framework.

The decision was based on recommendations of the working group to bring loan aggregation services offered by LSPs under a comprehensive regulatory framework.

Industry welcomes draft guidelines

Digital lending fintechs have welcomed the draft guidelines from the regulator.

“The emergence of web aggregators in lending is geared towards meeting these evolving preferences, providing consumers a thorough understanding of the available lenders. The digital view of all the loan offers will empower customers to make informed decisions. It will cultivate a culture of responsible borrowing and lending,” said Akshay Mehrotra, co-founder and chief executive officer (CEO), Fibe; a digital lending start-up.

Players said the draft guidelines may affect the overall experience of customers since they may face rejections on their loan applications.

“This is a welcome move from the regulator on transparency, but customers may face a challenge on the experience part. Loan aggregators offer loans from banks and non-banking financial companies (NBFCs) to customers. A bank may have a lower interest rate while an NBFC may have a higher one,” said Madhusudan Ekambaram, co-founder and CEO, KreditBee.

He added that a customer may opt for the offering with lower interest rates but may get rejected. In this case, borrowers will have to apply for different loans one-by-one affecting the experience.

“Earlier, an LSP would utilise artificial intelligence (AI) to map the profile of a borrower and match it with an offering,” he added.

Industry participants said the elimination of dark patterns will ensure responsible lending practices in the future. 

“This collaborative approach with clear expectations, like unbiased presentation and avoiding 'dark patterns,' paves the way for a digital lending ecosystem built on trust and responsible practices,” said Ankit Ratan, co-founder & CEO, Signzy.

EASING THE BURDEN

- Move to ensure that LSPs provide a digital view of the loans they offer to customers in partnership with other entities

- RBI said the identity of a potential lender may not be known to a borrower in cases where an LSP has arrangements with multiple lenders

- Digital view will provide details to ensure that customers have prior information about potential lenders to make an informed decision on a loan product