RBI issues new norms for LSPs to facilitate informed decisions by borrowers

Many LSPs offer aggregation services for various loan products.

An LSP is an agent of a regulated entity (RE) that executes one or more functions of the lender, such as customer acquisition, underwriting support, pricing support, servicing, monitoring, or recovery of specific loans or loan portfolios on behalf of REs, in accordance with existing outsourcing guidelines.

In December of the previous year, the RBI disclosed its plans to introduce a draft framework stipulating that connected lending, which involves extending loans to individuals capable of influencing or controlling the lender's decisions, could raise concerns if the lender fails to maintain a proper arm's length relationship with such borrowers.

The RBI noted that such lending can give rise to moral hazard issues, resulting in compromised pricing and credit management.

"In such cases, particularly where an LSP has arrangements with multiple lenders, the 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 digital view should include the name(s) of the RE(s) extending the loan offer, the amount and tenor of the loan, the annual percentage rate (APR) and other key terms and conditions in a way that enables the borrower to make a fair comparison between various offers, the draft said.

In September 2022, the RBI released "Guidelines on Digital Lending," focusing on "customer centricity" and ensuring full transparency to borrowers throughout the credit intermediation process.