RBI’s P2P lending norms: A step backward or forward?

Just when peer-to-peer lending in India was gaining traction, the Reserve Bank of India’s directions to govern the workings of non-banking financial companies engaged in marketplace lending could throw the spanner in the works.

While P2P lending segment is still at a nascent stage, it had picked up pace in 2016 to record disbursal of $2.5 million worth of loans. In comparison, the three years between 2013 and 2015 had recorded loan disbursal of about $2 million, while the overall online alternative finance industry in India had recorded transactions of about $57 million, show industry estimates.

Despite the fact that the new set of regulations was long due and was issued after consultation with leading Indian P2P players, certain provisions in the rules could prove counterproductive and detrimental to the nascent industry’s interests, feel experts.

P2P lenders, most of whom operate online, typically help borrowers get loans without collateral at rates higher than what traditional banks offer.

Several legal experts as well as industry executives across the P2P business who spoke to VCCircle point to several provisions that could have a negative bearing on the growth of the thus-far unregulated sector.

One, a stipulation that caps the aggregate exposure of a lender to Rs 10 lakh could be severely constricting. “Some HNIs (high-net-worth individuals) on our platform have already crossed aggregate lending of over Rs 1 crore. What will we do about that now?” asks Bhuvan Rustagi, co-founder and chief operating officer at Lendbox.in, one of the more prominent P2P lending platforms in India.

Sharad Moudgal, partner at law firm Khaitan & Co, says that although the RBI’s guidelines are a “good step in the right direction,” the Rs 10-lakh limit is “not good”. “This is a small amount and if the intention is to propagate financial inclusion, then it may not really be worthwhile for HNIs, who are looking to make money through this route.”

Moudgal notes that although the regulations prescribe limits both on individual lending and borrowing, they do not cap interest rates. “So, there is no protecting the interest of borrowers as well.”

However, LenDenClub co-founder and chief executive officer Bhavin Patel says that the Rs 10-lakh cap may be a “slight problem” but will “not break the business”. “Only 2-4% of the lenders on our platform have breached the Rs 10-lakh limit.”

As VCCircle had noted in a September report that online P2P lenders had started emerging out of the shadows around 2014-15 to cater to middle- and lower middle-class borrowers and small businesses, especially micro, small and medium enterprises, who did not have access to bank loans.

Having said that, P2P lenders control a mere fraction of the personal loan market in India. A section of analysts and industry executives put the estimate of the P2P lending market anywhere between Rs 25 crore and Rs 70 crore on an annualised basis. Compare this to the Rs 16,200 crore outstanding personal loan book that banks and other financial institutions had as of 31 July, and you begin to see the growth potential that the sector has.

In fact, if one looks at the RBI’s latest annual report, it becomes apparent that at a time when overall credit growth is at a decline owing to rising non-performing assets and a general economic slowdown, the personal loan segment grew nearly 19%.

In April 2016, the central bank had floated a consultation paper on framing regulations for the P2P lending space, and in almost one and a half years it finalised the regulations. But despite the time taken, a section of legal experts say that the classifications are “vague” and should, therefore, be fine-tuned.

But more significantly, they say, the requirement for a P2P lending platform seeking registration to have a net owned fund of at least Rs 2 crore is unwarranted. Although the RBI has made this threshold mandatory, like in the case of all NBFCs, to weed non-serious players out, legal experts like Mumbai-based Rishabh Mastaram, who represents several small P2P platforms, says that it is an unnecessary condition for such companies, whose only major spends are on technology and salaries.

“This is not a capital-intensive business. What will the company do with this excess capital? Where will they deploy it, when they cannot lend their own money?” asks Mastaram. “I have seen companies doing this business with an initial investment of no more than Rs 30-40 lakh, because the platform and development cost of the software is not more than that.”

In fact, Mastaram may have a point. According to the norms, the NBFC-P2Ps should act as intermediaries, providing online marketplaces or platforms to the participants involved, and are not allowed to raise any capital on their own.

They are also not allowed to raise deposits and lend on their own, or provide or arrange for any credit guarantee, or facilitate and permit any secured lending linked to their platform and not hold funds received from lenders on their balance sheets.

Moreover, they are also not allowed to cross-sell any product except for loan-specific insurance products, nor are they permitted to facilitate international flow of funds.

Khaitan’s Moudgal too agrees: “You are not lending out of your own funds as a P2P company. Fixing a leverage ratio requires a platform to arrange funds, which is going to be through equity or otherwise. So, this requirement could become onerous if you see it in conjunction with the fact that you need the RBI’s consent to change control or management.” It ultimately boils down to the argument on whether they are NBFCs or not, he adds.

According to Mastaram, the government needs to bring in a new set of rules for crowdfunding rather than applying NBFC regulations on P2P lenders. “I think what the RBI and the finance ministry wanted to do was to bring in regulations on crowdfunding, which is getting delayed. A small part of crowdfunding is P2P lending, which they have started regulating. I don’t think they have thought through enough.”

There are typically three models through which P2P firms operate – directly matching potential lenders with borrowers; the marketplace model, wherein they raise money from banks and other financial institutions and lend it in small ticket sizes; and in the loan aggregation business.

“If they (P2P lenders) are extensions of banks, then it would have been worth it (having a net-owned fund and leverage ratio). But for non-institutional investors, I don’t think this kind of regulation would work,” says Mastaram.

The new rules also stipulate an NBFC-P2P to undertake due diligence on participants, do credit assessment and risk-profiling of borrowers, seek explicit consent of the participant to access its credit information, undertake documentation of loan agreements, provide assistance in disbursement and repayment of loan amount, and render services for loan recovery.

The mandatory requirement for P2P platforms to provide assistance for the recovery of loans, say experts, could become problematic. “While that’s a good initiative and that’s also something that a platform can diversify into from a monetisation perspective, there is no clarity on what the platform needs to do to assist lenders for loan recovery.” says Moudgal.

“These are essentially fintech startups, which are not equipped to recover loans. So, they will have to tie up with an agency which does that, and that will mean a cash outgo for these entities,” he adds.

Experts feel the sector has huge potential in India given the global trend, which is galloping at a breakneck speed. Figures available with Peer2Peer Finance Association (P2PFA) say that marketplace lending had witnessed £8.5 billion in loan disbursals during the first quarter of 2017, against £5.8 billion three quarters earlier. During the same period, the number of lenders grew from 1.5 lakh to just over 1.8 lakh.

However, although the US, the UK, Europe and China are considered relatively mature P2P lending markets, they have seen their fair share of scams, the most recent being a mammoth $8.6 billion alleged fraud involving Chinese P2P lender Ezubao.

Rustagi of Lendbox says that although problems remain, the industry is, by and large, happy that a beginning was made. “I guess as a starting point, we are glad that it has happened. Now, we can push the RBI to make changes.”

According to Rustagi, at least five big P2P lenders in India – Lendbox, LenDenClub, Faircent, i-Lend and i2i Funding are getting together to form a lobby group to get their voices heard.