The Regulator’s Dilemma: What Policy Could Do Next

Lending, Reimagined, Part 6 of 7

A borrower can receive every disclosure, tick every box and still take a loan that makes their life harder. That is the uncomfortable problem at the centre of lending regulation.

Making credit available matters. So does making it understandable. But access and disclosure do not answer the next question: was this a reasonable product for this person, in these circumstances?

In the previous article, we described the lending experience we want to build at Finanjo. This time, the question is what policy can do to make that experience more common, without quietly pushing people out of the formal system.

The starting point is not a regulatory vacuum

It would be wrong to say that digital lenders in India have no obligations beyond getting a signature. RBI’s 2025 Digital Lending Directions address creditworthiness, cost disclosures, comparison of offers, customer support and the conduct of lending service providers. A multi-lender interface must present relevant offer information objectively and disclose the metric used to rank offers. The framework also provides a cooling-off exit on specified terms. Read the RBI Directions.

These are meaningful protections. They also leave an implementation question: what does the customer actually understand at the moment of choice?

A borrower may know the monthly instalment without understanding the total repayment. They may see several offers without knowing whether a different type of product would be more appropriate. They may assume that appearing at the top of a list means an option is best for them.

The next stage of consumer protection should be judged partly by those moments. A compliant document is necessary. The customer’s ability to use it is the test that follows.

Suitability is becoming a more explicit expectation

RBI’s Commercial Banks Responsible Business Conduct amendments of 15 June 2026 are scheduled to take effect on 1 January 2027. For the institutions covered, they strengthen expectations around suitability, sales incentives and feedback. The suitability assessment has an exception for products a bank’s policy determines are suitable for all customers. These provisions should not be described as already effective in October, or as one identical rule for every lender. The notification is reproduced here.

This direction matters because consent and suitability answer different questions. Consent establishes that a person agreed. Suitability asks whether the product fits the circumstances assessed at the time.

For a founder, the implication is practical. We should be able to explain the reasoning behind a recommendation, including the information we used, what was missing and what could change the conclusion. An elegant screen cannot substitute for that record.

A price cap answers one question, not every question

When people see very expensive loans, a cap on the price is an understandable response. It creates a boundary that both customers and lenders can recognise.

The UK provides one example with a specific scope. The FCA’s cap for high-cost short-term credit includes a daily cost limit, a limit on default fees and a total cost limit. It is not a cap on every consumer loan in Britain. Under the total cost limit, interest and charges cannot exceed the amount borrowed. The FCA explains the rules and their scope.

India should be able to debate price limits without pretending the trade-offs disappear. A cap set too high may do little for borrowers. A cap set too low could make some customers uneconomic to serve formally. Providers might change fees, tenures or product structures. Whether these effects occur, and how large they are, requires evidence.

That is why I would want any proposed intervention tested against more than the average interest rate on loans that still get made. Who lost access? What did they do instead? Did total repayment fall? Did distress fall? Did charges move somewhere less visible?

A lower advertised rate is not a sufficient result if the borrower ends up in a worse position elsewhere.

Affordability has to survive an ordinary bad month

Consider an illustrative borrower earning ₹50,000 a month. Rent, food, family commitments and existing repayments leave ₹8,000 before irregular expenses. A new ₹6,000 instalment may appear affordable if the assessment treats that entire balance as spare money.

But school fees, travel, repairs and delayed income are not extraordinary events in the life of a household. An assessment that ignores them can be precise and still be wrong.

I would like policy implementation to encourage a clear explanation of the buffer left after repayment, and reasonable checks on information that could materially change it. That does not mean every borrower needs to complete an endless questionnaire. The depth of the assessment should be proportionate to the product and the risk.

It also does not mean one national ratio will capture every household. Income stability, dependants, essential expenses and the duration of the commitment all matter. Rules need enough consistency to be enforceable and enough flexibility to avoid turning an imperfect proxy into a verdict.

For platforms, the obligation is to resist false certainty. Connected account data can help. It will not reliably reveal every cash expense, informal obligation or upcoming event. If the missing information could change the recommendation, ask.

Make the reason for the recommendation visible

Imagine a short explanation beside an offer: why it was shown, which alternatives were considered, what the platform earns and which important facts still need confirmation.

That is a product proposal, not a claim that every detail is already prescribed in a standard form. It could make both customer choice and later review easier.

It should include the possibility that none of the available partner offers is a good fit. A marketplace with five partners should not imply that it has compared the entire market. A system trained to always produce an offer will struggle to deliver an honest recommendation.

The same explanation should survive a complaint. If the recommendation changes when commission payouts change, the business should be able to detect that. If the customer was steered towards a longer tenure, the record should show the trade-off between monthly affordability and total cost.

Redress should be easy to find and easy to follow

When something goes wrong, the borrower should not have to untangle the commercial relationship between an app, a service provider and a lender before finding help.

RBI’s digital-lending framework requires designated grievance officers and published contact details. That is the starting point. A useful customer experience also needs a clear account of what was received, who owns the issue and what happens next.

My preference would be for complaints to create a learning loop inside the product. If customers repeatedly misunderstand the same charge, improve the explanation. If a recommendation repeatedly leads to an unsuitable outcome, review the decision process. A resolved ticket should not erase the underlying pattern.

This needs careful interpretation. A complaint rate alone can mislead: a service with an accessible complaints process may record more issues than one that makes complaining difficult. Regulators and companies should examine the nature of complaints, the time to resolution and whether the remedy actually addressed the problem.

Measure access and outcomes together

The easiest lending numbers to count are applications, approvals and disbursals. None tells us whether a household is better able to manage its obligations.

A more useful policy experiment would follow several outcomes together: total cost after fees, repayment difficulty, repeated refinancing, complaint resolution and continued access to suitable credit. Results should be compared among reasonably similar borrowers and observed over enough time to capture repayment.

Without that discipline, a lender could appear safer simply by rejecting everyone except the easiest customers. Another could appear inclusive by approving loans that people cannot reasonably sustain. Both would miss part of the objective.

The FCA’s Consumer Duty offers a broader reference point: good faith, avoiding foreseeable harm and supporting customers’ financial objectives. It is a useful direction for comparison, not a rulebook that can be transplanted without regard to India’s institutions and households. Read the FCA’s explanation.

What founders can do before the next rule arrives

We do not need to wait for a universal scorecard to document recommendations, disclose conflicts, check whether customers understood a commitment and make support easy to reach.

At Finanjo, these are standards we want to build into Loan Buddy and Jo. They should apply even when the useful answer produces no transaction. Policy can set a floor, but the company still chooses what it rewards each week.

The regulator’s dilemma is real: protect people from unsuitable credit while preserving access to useful credit. The answer will require enforcement, product design and evidence about actual outcomes. One headline limit or one more consent box will not carry the whole burden.

The final article turns to the people financing these businesses. If we want companies to make these choices, investors need to ask questions that give them a reason to do so.

Policy position as checked on 6 October 2026. The June 2026 notification was reviewed through a full-text reproduction. The household example and suggested policy experiments are illustrative proposals, not observed customer results or a statement of legal entitlement.

Previous: What User-First Lending Actually Looks Like
Next: The Investor Lens: Why Trust-First Lending Is the Better Bet
Explore the Founders Office