- 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 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.
- 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