The Reserve Bank of India has finally released guidelines for peer-to-peer (P2P) lending platforms, henceforth, non-banking financial companies (NBFCs-P2P). The norms, effective immediately, require all P2Ps to apply for registration as NBFCs.  

For India’s P2P lending market, which is predicted to be worth $4-5 billion by 2023, rollout of these guidelines gives more legitimacy to the business. The general response to the guidelines has been positive. They are expected to help the sector realize its potential and pave the way for P2P platforms to gain legality, transparency and credibility. This will help in its goal of financial inclusion as well as in establishing P2P lending as an alternative investment opportunity and an asset class.

Here are some salient features of the guidelines released by RBI:

Registration Process

All existing and prospective NBFC-P2Ps will be required to submit an application for registration with the Department of Non-Banking Regulation, Mumbai. However, existing NBFC-P2P have been given 3 months to apply for registration, till then they can continue their operations, as usual. Also, RBI will help in facilitating a smooth transition for existing P2P lending platforms within the timelines set by it. 
 

Net-owned fund of not less than Rs 2 crore

The RBI has said that every company seeking registration should have a net-owned fund of not less than Rs 2 crore.

It seems that RBI is only welcoming serious players who have their skin in the game and discourage fly-by-night operators. This will, in the long run protect, Lender and Borrower interest and increase credibility of the industry. Further, to run a robust and stable P2P lending platform, adequate investment in technology, credit risk assessment, customer support etc. is needed.

Leverage Ratio of 2:1

RBI has asked NBFC-P2P to maintain a Leverage Ratio not exceeding 2. The leverage ratio is actually the ratio of debt against owned capital and not the lending on the platform. This guideline is expected to bring higher financial stability to platforms.

Escrow accounts

The guidelines say that any fund transfer between participants on a P2P lending platform shall be through an escrow account, which will be operated by a trustee. At least two escrow accounts, one for funds received from lenders and pending disbursal, and the other for collections from borrowers, shall be maintained. “The trustee shall mandatorily be promoted by the bank maintaining the escrow accounts,” the regulator said.

Faircent.com was the first platform in India to launch Escrow accounts, under the trusteeship of IDBI banks, way back in February 2017. Ever since the launch of Escrow account, financial transactions on the platform have become faster, smoother and more secure.  

Cap on Lending and Borrowing Amount

The central bank has said that the aggregate exposure of a lender to all his/her borrowers at any point, across all P2Ps, should be capped at Rs 10 lakh. The aggregate loans taken by a borrower at any point of time, across all P2Ps, has also been capped at the same amount. The exposure of a single lender to the same borrower, across all P2Ps, shall not exceed Rs 50,000.

This guideline does seem restrictive as diversifying investments across multiple borrower categories is the best way for lenders to maximize their returns on P2P lending platforms. To that extent, the limit is too low and should be revised upwards. 

The P2P lending business model depends on both lenders and borrowers, and, if sufficient funds are not available for lending, consumers will be driven to the unorganized sector, leaving them vulnerable to exploitation. This defeats the entire purpose of financial inclusion that P2P lending contributes to. However, we are hopeful that as more clarity emerges over the next few months and existing platforms engage with RBI, this limit will either be revised upwards or removed.

Submission of data to Credit Information Companies (CICs)

Henceforth, an NBFC-P2P shall become member of all CICs and submit data (including historical data) to them. This should help reduce default rates and bring more credibility to the system.

Overall, the regulations are progressive and a positive move. They will undoubtedly help online P2P lending platforms break forth into the mainstream financial market. The growth in the global market rose by nearly 3-4 times following regulations introduced in countries like US, UK, Germany, China, Singapore and Hong Kong –leaders in Global P2P lending space. The market share of the North American P2P lending market, for instance, rose from 39% to 43% between 2014 and 2016 when the US government began regulating lending platforms in the country. 

In India, these guidelines will usher in greater stability and credibility for the digital P2P lending model, thereby establishing it as a lucrative asset class like other market-linked investments such as mutual funds, SIPs, stocks etc. Over a period, the increasing awareness will also drive large-scale financial inclusion by facilitating easier access to credit for the country’s unbanked and underbanked segments.