Allow borrowers to make free choice: RBI draft rules for digital loan aggregators

Manisha Ghosh l manisha.ghosh@vinodkothari.com

In a move aimed at fostering transparency and consumer-centric practices in digital lending, the Reserve Bank of India (RBI) issued draft guidelines for digital loan aggregators on 26th April, 2024  titled ‘Digital Lending – Transparency in Aggregation of Loan Products from Multiple Lenders’. Comments are due on the same.  This regulatory framework underscores the importance of empowering borrowers with complete information during the credit process to make an informed decision.

The proposed guidelines only cover the disclosure part to enable the customer to make a free and informed choice, but the ground rules for loan marketplaces have not been formulated by the regulator. Loan marketplaces is  a very important facet of digital lending; in a very narrow sense, this prevails in India as P2P lending, however, loan marketplaces consist of regulated entities that are lenders rather than “peers” as in case of P2P.

The focal point of the RBI’s ‘Guidelines on Digital Lending’ (DL Guidelines) is to prioritize ‘customer centricity’ and ensure that borrowers are fully apprised of the loan products available to them as often Lending Service Providers (LSPs) engage in outsourcing arrangements with multiple lenders. Importantly, the proposed regulations say that the aggregator will not put a particular lender to any distinctive advantage, that the aggregator will have a consistent approach to tagging the borrower to a particular lender(s), which approach shall be unbiased and disclosed.

The DL Guidelines define LSPs as 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 issued by the Reserve Bank.

Oftentimes LSPs are partnered with multiple banks and NBFCs, aggregating loan products of its various partners on a single electronic platform which enable the borrowers to compare and choose the alternative according to his/her need.

It is important to note that RBI is regulating the RE and not the LSP, so are the guidelines so issued also for the RE? The guidelines are applicable to LSPs or a Regulated Entity (RE) acting as an LSP but the responsibility of ensuring the following compliances shall be upon the RE.

Digital View of Loan Offers

Presently, at the time of application for loan on the Digital Lending Application/Digital Lending Platform an upfront view of the options available to the borrower is not provided to, due to this borrowers are unable to choose the option that fits best with their requirements.

The draft guidelines propose the requirement for LSPs to provide a digital view of the loan offered through it by all the willing lenders to the borrowers as per the borrower’s requirements.

Ascertaining ‘willingness’ of a lender?

The question arises who shall be considered as willing lenders? If the lenders have partnered with the  LSPs to provide loans, would it be considered as deemed willingness to lend through the platform, if so, then details of all loan offers should be disclosed on the lending platform.

The draft guidelines provides discretion to LSPs for determining the criteria for ascertaining the willingness to lend, the guidelines however requires the LSPs to have a consistent approach and disclose the same on their website. This poses quite a difficulty, as complete discretion has been granted to LSPs, the offers that are disclosed to the borrower on the platform can be easily manipulated.

How often should the willingness be reviewed? In what circumstances would it be said that the lender is unwilling? Does the lender have any power over such ascertainment? are some questions that remain unanswered.

Components in the Digital View

As the rationale for the draft guidelines is to allow the borrower to make an informed decision by comparing all his/her options, it can be deduced that the elements of the loan that would help the borrower analyze the key differences between the loan offers shall be displayed in the digital view.

The  draft guidelines propose that the digital view shall at least include the name of the lender, amount and tenor of loan, Annual Percentage Rate (APR) and other key factors.The guidelines further mandates the LSP to provide a link to the Key Facts Statement (KFS) in respect of each of its lenders in the digital view. 

No preferences to any lender

As the authority to determine the above components have been left upto the discretion of the LSPs there is a high chance where the LSP may favor a lending partner over others. To protect the borrower from any such biases, the draft guidelines require the content displayed by the LSP to be unbiased and not directly/indirectly promote or push a product of a particular RE, including by use of any practices or deceptive patterns, i.e., using ‘dark patterns’  designed to mislead borrowers into choosing a particular loan offer.

An important question that comes is – can an aggregator be providing his own risk participation – say, DLG, to some lenders, while not having a similar arrangement with others? Note that the proposed rules say “The content displayed by the LSP shall be unbiased and shall not directly/indirectly promote or push a product of a particular RE”. It is quite likely that where there are guarantee arrangements with some lenders, not with others, there will be a natural tendency to push volumes on such arrangements.

Another important question – if the aggregator is an RE itself, can the aggregator join as a co-lender with the outsourced lender? In essence, can an aggregator assume the position of a lender itself? While such an arrangement is not ruled out, the rules on disclosure – that the aggregator is also a lender, and the KFS to that effect – need to be disclosed.

A lurking question may be – the fees charged by the aggregator from different lenders may be different. Is that a reason to believe that the aggregator may use one or more tactics to push volumes with the more advantageous relationship? The proposed rules do not seem to be requiring the lender to make disclosure on his own fees, and therefore, the aggregator may have differential arrangements – however, bearing in mind the rules about bias and free choice to the borrower.

The proposed guidelines also prohibit use of dark patterns for promoting or pushing a loan product on the borrowers.The ‘Guidelines for Prevention and Regulation of Dark Patterns, 2023’ dated November 30, 2023 define dark patterns as any practices or deceptive design patterns using  user interface/user experience (UI/UX) interactions on any platform; designed to mislead or trick users to do something they originally did not intend or want to do; by subverting or impairing the consumer autonomy, decision making or choice; amounting to misleading advertisement or unfair trade practice or violation of consumer rights.

A detailed explanation of the term dark pattern can be read in our article titled Digital deceptive practices: Dark patterns get blacked out.

In our view, the proposed regulations are skeletal and are missing the detailed rules on loan aggregators which will be needed eventually.

Other related resources

Resources on Digital Lending