RBI to come up with unified regulatory framework on connected lending

• Unified regulatory framework on connected lending aims to strengthen pricing and management of credit by regulated entities.
• Experts believe that this move is related to bank lending to NBFCs.
• RBI will also come up with a regulatory framework for web-aggregation of loan products.

The Reserve Bank of India (RBI) said on Friday that it will come up with a unified regulatory framework on connected lending for the entities it regulates. This move is to strengthen the pricing and management of credit by regulated entities.

“The extant guidelines on connected lending are limited in scope,” said Shaktikanta Das, governor of RBI said in his speech where he announced that the Monetary Policy Committee has decided to keep repo rates unchanged.

RBI’s deputy governor Rajeshwar Rao clarified at the press conference that the regulations do not refer to interconnectedness. “Connected lending refers to persons who are in the position to control the decision of the lender,” he said, without giving any more details.

Das said that it refers to cases where the director of a bank borrows from the same bank and can have some influence. It also refers to cases of related parties as well, he clarified.

“It has nothing to do with interconnectedness,” Das said.

The central bank has recently increased the risk weightage on unsecured loans given out by banks and NBFCs. “It’s a pre-emptive measure to address potential risks. We don’t wait for the house to catch fire and then act,” said Das.

Neutrality and transparency to web-aggregators of loans

The RBI also said it will lay down a regulatory framework for web-aggregation of loan products. Das said that he has noticed that such loan products are harming consumer interest and the framework is expected to result in enhanced customer centricity and transparency in digital lending.

This move is a follow-up to the recommendations they received from the working group on digital lending norms, says Rabi Shankar, deputy governor of RBI.

The Reserve Bank had introduced a regulatory framework for digital lending in August/September 2022. The digital lending ecosystem also comprises of services that aggregate loan offers from lenders (called web-aggregation of loan products) for guidance of customers.

“Lenders on web platforms get their information from various sources and give weightage to customers. Sometimes they might miss something,” added Shankar. Das said that the move will bring neutrality, transparency and avoid mis-selling and also not influence the decision of the borrower.

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