How RBI’s Strict Scrutiny Changed the Demographics of P2P Lending?

Following a "scrutiny" of "select NBFC-P2P companies" from June to September 2023, the Reserve Bank of India (RBI) discovered "multiple violations" of the regulations established in October 2017, when the licensing standards were published, to welcome these companies to the Indian financial market.

It was preceded by the RBI's March 2016 release of the initial P2P lending draft for stakeholder comment. In addition to meeting the criteria for being "fit and proper" to operate P2P platforms, a minimum of around 2 crore net-owned money is required according to the licensing standards.

Although not all of the approximately 25 licenses issued by the RBI have gone live, some of them have. Approximately one-third of the fifteen entities that went live have now gone dark. According to analysts, the industry's outstanding loan book is estimated to be over 6,000 crore, and four companies control more than 90% of the market.

A loan of approximately 10 lakhs could be made at the outset. The amount increased to over 50 lakhs in December 2019. Through P2P platforms, a lender can distribute this funding to numerous borrowers. But regardless of how many lenders there are, a borrower cannot receive more than ~10 lakh. The maximum amount that a lender can lose due to a single borrower is around $50,000. (A minimum of 20 lenders are required in the event that a borrower requests ~10 lakh.)

Platforms that facilitate peer-to-peer (P2P) lending allow users to pool their savings in escrow accounts and then lend those funds to other users or small businesses without requiring collateral.

Why Is RBI So Irritated?
Industry Adopting a ‘Wait and Watch’ Policy

Why Is RBI So Irritated?

Lenders can access their money before loans are fully processed on P2P platforms. This implies that over the remaining time of the loan, a different lender will take over for the first one, without the lenders on the platform having to say anything. The "deposit-taking" feature of these NBFC-P2Ps is the root cause of loan replacement.

Loan contracts on the platform must be signed by both the lender and the borrower in accordance with RBI regulations. But instead of that, platforms are only giving out loans to people who have lenders' whole approval. The standards for licensing are being violated here.

The standards that control the transfer of money are another source of worry. In order to reinvest the funds, these platforms are moving the repayments from the borrower's escrow accounts to the lenders' escrow accounts. Repayment funds must be sent from the borrower's escrow account to the bank account of the lender.

P2P platforms have been issued a stern warning by the RBI, urging them to immediately cease these actions. They risk regulatory and supervisory measures if they do not.

Industry Adopting a ‘Wait and Watch’ Policy

The official explained that new alliances take substantial time, technological, and legal resources to be integrated, thus the industry is simply taking a "wait and watch" approach rather than rapidly expanding.

Liquiloans has partnered with a number of prominent P2P lenders, including Cred, Avail Finance, Uni, and BharatPe; LenDen Club has partnered with PhonePe, Karza, and BharatPe. The general pace of business has decreased, even though partnerships are still continuing. Since October, corporations have been consistently engaging with the RBI, therefore experts do not see this trend continuing.

During an occasion, RBI deputy governor M. Rajeshwar Rao reportedly stated that NBFC-P2Ps' actions did not seem to comply with regulatory norms. The majority of the lenders on these sites probably don't have the training or education to properly assess the dangers of lending money.

While the RBI first published comprehensive rules for the market in 2017, 2019 saw the introduction of certain updates to those rules. However, the central bank has been providing platforms with guidance on several aspects of compliance over the past 12 to 18 months.

The Department of Regulation at RBI has been approached by these businesses to clarify several important matters. A decision on these practices is also required by the Department of Supervision.

The peer-to-peer lending market is currently valued at an estimated 7,000–8,000 crore rupees. About twenty P2P licensing systems can be found in India. They are all NBFCs that have registered with the RBI.

Payouts, processing fees, and platform fees all contribute to the platforms' bottom lines. The maximum amount that a lender can put on a platform is Rs 50 lakh. One borrower is limited to an investment of no more than Rs 50,000.

At no point in time should a borrower's total loan amount exceed Rs 10 lakh. This loan has a maximum maturity term of 36 months. An annual interest rate of 36% is charged by some sites.

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Conclusion

The Reserve Bank of India's intensified scrutiny of NBFC-P2P companies has revealed multiple violations of established regulations, including issues with loan processing, fund transfers, and compliance with licensing standards.

Despite partnerships and engagement with the RBI, concerns persist regarding the industry's compliance and operational practices. The conclusion underscores the need for stringent regulatory oversight and enhanced industry compliance to sustain the integrity and stability of the P2P lending market in India.

FAQs

Which is the largest P2P lending platform in the world?

Lending Club is the world's largest P2P platform.

Is P2P lending legal in India?

Yes, P2P lending is completely legal and fully regulated by RBI in India.

Which P2P lending is best in India?

Some of the most popular P2P lending platforms in India are LenDenClub, Faircent, Lendbox, etc.