In 2015, around 20 new online P2P lending companies were launched in India. At present, there are around 30 start-ups in the P2P lending business in India.
P2P or peer to peer lending means lending money to individuals, or “peers”, without going through a traditional financial intermediary such as a bank or other financial institution. It can also be defined as the practice of lending money to individuals or businesses through online services that match lenders directly with borrowers. Since the peer-to-peer lending companies operate entirely online, they work on lower overheads and provide a host of services at a much cheaper rate than the traditional financial institutions. Due to low working capital requirements, they are capable of offering higher interest rates to Lenders as compared to savings and investment products of banks, while borrowers get the advantage of borrowing at lower interest rates, even after the P2P platform has charged a fee for providing their services including credit assessment of the borrower.
The growing popularity of P2P lending in Indian capital market can be owed to the simplicity of this structure. As it is an unregulated segment, these platforms operate in accordance with their own set of policy and practices. There is no set benchmark of operations or statutory backing for regulating this system. Being a new business model, same set of laws applicable to other financial structures cannot be applied to it. On realizing the gravity of the situation, RBI released a consultation paper on how to regulate the P2P lending structure in April, 2016.
This consultation paper became a debatable topic in economic conferences and conclaves. To address the concerns of general public, Shri R.Gandhi, Deputy Governor of RBI recently stated in an economic summit that it is the right time for regulation of P2P lending. In the light of the rationale discussed hereinbelow, one can correctly appreciate the measure taken by the apex banking and finance market regulatory institution.
Firstly, the impact of P2P lending platform on traditional banking system is still unaccounted for which is a cause of concern in itself as this may lead to disruption in the financial sector. The fear of any unknown or unwanted change in the positive economic scenario, mandates regulation of this financial structure.
Secondly, P2P lending will be promoted as an alternative source of finance and more people will be encouraged to use this lending structure. Economic condition will also improve with an increase in flow of funds. It may also encourage other lending institutions to soften the lending rates in order to successfully compete with P2P platforms.
Thirdly, to eliminate the risk of adoption of unhealthy practices by some players and to protect consumer’s interest through prevention of fraudulent transactions.
Being the only lending platform catering to small ticket funds at low interest rates, it may move towards monopolistic exploitation and cause imbalance in the financial market. To check such monopolistic tendencies, regulation is essential.
Fourthly, there are certain provisions of RBI Act, 1934 which may create problems for operation of P2P platform in India. Section 45S of RBI Act, 1934 prohibits individuals, firms, or unincorporated body of individuals from accepting deposits if they carry on activities of financial institution as defined under Section 45- I of RBI Act, 1934. Further, as per Section 58B (5A) of RBI Act 1934, if such individuals, firms or unincorporated association act in contrary to aforesaid provisions, they may be imprisoned for a term extending to 2 years or fine amounting to double of the deposit accepted or with both. If P2P lending platforms want to run their operations legally, they have to comply with the existing RBI Act and other law provisions for the time being in force. Therefore, regularization is essential for continued functioning.
Other factors favoring regularization include orderly growth of the financial model, prevention of money laundering, transparency in operations and implementation of effective consumer grievance redressal mechanism.
The RBI Consultation paper has put forward the following propositions for regularisation and invited suggestions on the same:
1. In order to bring P2P lending under the purview of RBI, it shall be treated as a Non-banking financial institution (NBFC).
2. All the transactions between the lender and borrower shall take place directly through bank account transfers. P2P platforms will be prohibited to take deposit from the lenders. This will remove the contradiction between the RBI Act provisions and operating practice of P2P lending. Additionally, the threat of money laundering is also tackled effectively.
3. RBI will act as the regulatory authority and supervise the operations of P2P platforms.
4. P2P platforms to be incorporated as Company. This has been suggested as RBI cannot regulate individuals or partnership firms but only company and corporate societies.
5. Minimum capital of 2 crores is fixed to prevent formation of dummy or misleading companies. This provision of capital requirement will ensure continued operations of the company even when it experiences a rough patch.
6. Provision for leverage ratio will also be made by RBI as a prudential norm for maintenance of solvency.
7. Restrictive provisions on the amount of lending that can be granted by one Lender or the amount that can be deposited in favor of one Borrower, may be prescribed.
8. Regulation on fund advertisement by the platform.
9. Corporate governance- Some of the Board members must have experience in finance sector. Other qualifications may also be prescribed for Promoters, CEO and Directors of the Company to be declared fit for working in the P2P platform. Provisions for physical presence of office and management within the domestic territory is also under consideration.
10. Risk management system to be maintained and reported to RBI for smooth operations of the platform.
11. Regular reporting to RBI regarding loan amount, financial position, consumer grievances, etc..
12. Provision for installation of system for guaranteeing confidentiality of customer data will be mandatory.
13. For recovery of loans, existing guidelines of NBFC’s are to be followed.
14. Prohibition on providing assurance of return for any investment.
All these propositions have been well received with some suggestions by participants and drivers of P2P lending in India.
- The lending transaction should be tracked by a separate nodal agency or through an escrow account for transparency and accountability in the financial transactions.
- The Owners of P2P Company should be given the right to directly approach credit information bureau and report Defaulters.
- P2P is a new financial model and it should not be treated as traditional NBFCs. With grant of status of NBFC, the P2P system will suffer the consequences of heavy regularization which may take away the attractiveness of the simplicity of this structure.
- The provision for leverage ratio cannot be made applicable to P2P lending because no credit is given by the platform directly. Instead, provision for credit insurance fund could be made to protect the investors.
- The large capital requirement of Rs. 2 Crores is uncalled for, alternatively flexible provision for maintenance of capital in accordance with the outstanding loan amount could be adopted.
- Most importantly, NRIs should be allowed to invest in the P2P fund as they are one of the biggest contributors to this fund.
The RBI should act upon these suggestions and come up with a user- friendly legislation on P2P lending. Otherwise, the success of this financial model will be short lived due to the formulation of rigid and complex rules by RBI.