Editorials, GS-3, Uncategorized

P2P lending: towards easy funding

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Issue

  • Analysis of the guidelines issued by the Reserve Bank of India (RBI) on peer-to-peer (P2P) lending.

What is P2P lending?

  • To bridge the gap of unavailability of proper formal credit, an aggressive breed of loan providers has emerged in India, called peer-to-peer (P2P) lending.
  • The concept is not new—it is basically an individual, who is not a financial institution, lending money to another individual.
  • P2P lending is similar to a friend lending to you, but in this case, you have to pay an interest on the loan and the lender is a stranger.
  • Online P2P lending companies work as marketplaces that bring individual borrowers and lenders together for loan transactions without the intervention of traditional financial institutions such as banks and NBFCs.
  • Through partnerships with leading banks, P2P lending is now moving towards offline channels.

RBI guidelines

RBI has proposed following key areas to frame the regulatory guidelines around P2P lending.

(1) permitted activity; (2) reporting, (3) prudential and governance requirements; (4) business continuity planning and (5) customer interface.

Analysis by the author

Scope of permitted activites:-

  • The scope of permitted activities needs to be defined clearly, especially in view of the aggressive expansion plans of P2P players.
  • For instance, what kind of advertisements can be displayed on the websites of these portals.

Regulation of Guarantees

  • The aggressive lending plans of P2P players may lead to questionable practices such as credit enhancement or other financial incentives offered by the P2P platform.
  • If these platforms are allowed to give guarantees, then some prudential norms need to be put in place.
  • Alternatively, P2P lenders could also take the benefit of availing specific products, such as credit risk protection from a registered Indian insurance company.
  • There is a possibility that many lenders could get duped into investing because of the guarantee, which may be difficult to meet at a later date.
  • Perhaps, their performance should be observed before the RBI allows them to continue with their guarantees and if approved, then provide them with an insurance against it.

Differentiation is required

  • There needs to be clarity on the maximum ticket size of transaction that can be serviced by a P2P lender to clearly differentiate them from other lenders, such as microfinance institutions and banks.

Periodic assessment of the lending pool

  • There should be a periodic assessment of the lending pool by an independent credit rating agency.

“Brick-and-Mortar” presence in India.

  • The compulsion for P2P lenders to set up an office will enable personal scrutiny of records, but could result in operational inefficiencies.
  • Instead, RBI could take a cue from the ‘online only’ foreign banks. Mandating disclosure requirements on their websites can increase efficiency and improve transparency of the model.

Protect the stakeholders

  • The interests of stakeholders, especially lenders, in case the platform goes bankrupt, should be protected.
  • There needs to be clarity on whether all contracts will continue to stay enforceable and how will investors be serviced.

Conclusion

  • The guidelines should strike a balance between overregulation and leaving too many loopholes. If guidelines are too strict and harsh, it will bring down the P2P market.
  • If P2P isn’t well regulated and things get ugly, the government will come back with heavy restrictions.
  • But, in any case, the guidelines will bring awareness about the sector and more individual lenders will come on board.
  • To conclude, P2P lending has the potential to be disruptive. Hence, its platform guidelines should not promise extraordinary returns to lenders

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