RBI Proposes New Norms For LSPs To Promote Transparency

The Reserve Bank of India (RBI) on Friday proposed that lending service providers (LSPs), acting as agents of banks, should give information on all the loan offers available with them to borrowers so that they can make an informed decision. Many of the LSPs offer aggregation services for loan products.

LSP is an agent of a regulated entity (RE) who carries out one or more of lender's functions or part thereof in customer acquisition, underwriting support, pricing support, servicing, monitoring, recovery of specific loan or loan portfolio on behalf of REs in conformity with extant outsourcing guidelines.

In December last year, the RBI announced to issue draft framework saying connected lending or lending to persons who are in a position to control or influence the decision of a lender can be of concern, if the lender does not maintain an arm's length relationship with such borrowers.

Such lending can involve moral hazard issues, leading to a compromise in pricing and credit management, it had said.

"In such cases, particularly where an LSP has arrangements with multiple lenders, identity of the potential lender to the borrower may not be known upfront to the borrower," said the Reserve Bank's draft circular on 'Digital Lending -- Transparency in Aggregation of Loan Products from Multiple Lenders'.

The draft proposed that the LSP should provide a digital view of all the loan offers available to the borrower, as per his/her requirements, from all willing lenders with whom the LSP has arrangements with.

"While the LSP may adopt any mechanism to ascertain the willingness of the lenders to offer a loan, it shall follow a consistent approach in this regard, which shall be disclosed suitably on their website," said the draft on which the RBI has sought comments from stakeholders by May 31.

The digital view should include the name(s) of the RE(s) extending the loan offer, amount and tenor of loan, the annual percentage rate (APR) and other key terms and conditions in a way which enables the borrower to make a fair comparison between various offers, the draft said.

In September 2022, the RBI had issued "Guidelines on Digital Lending" with focus on "customer centricity" and ensuring complete transparency to the borrower in the credit intermediation process.