“Fintech is dead. Long live the banks,” said a founder of a large peer-to-peer (P2P) lending company on the recent spate of regulatory actions concerning digital lending and fintechs.

In its latest action, the Reserve Bank of India (RBI) on August 16 disallowed P2P companies from offering investment products with features like tenure-linked assured minimum returns and liquidity options, which has led a few P2P companies to stop generating new business altogether, four industry sources told businessline.

“Most of the players including us are pausing new investments till we comply with the revised RBI guidelines. The SEBI on August 7 said that to boost the corporate bond market, liquidity is a must. For liquidity, the secondary market is very important. But the RBI has completely killed the secondary market and hence the liquidity,” said an official at a large P2P company. Another small-sized P2P company “India P2P” has also reportedly stopped withdrawals and onboarding new customers temporarily.

Regulatory impact

The official quoted above said that lenders on P2P platforms could earlier sell their performing loans in the secondary market, but the RBI’s new diktat disallows such practices. “Volumes will take a hit. The features that the RBI has disallowed were extremely beneficial both for lenders and borrowers. The lending experience was very seamless, for borrowers, disbursements were very fast. Now with these new updates, lenders will not have a good experience and would not like to participate,” said an official at a large P2P company.

Settlement update

Furthermore, the circular also stated that P2P companies must follow the T+1 settlement model, wherein repayment made by a borrower must be credited to the lender’s account within a day. Bhavin Patel, co-founder & CEO of LenDenClub — a large P2P exchange — said that the RBI has been actively auditing P2P players’ books for the last one year and even visited many P2P companies’ offices to understand business models.

“It is difficult to implement the T+1 settlement cycle. While the regulator’s intentions are good, certain practical problems are there to achieve it,” he said. “Many equity/bond investment categories have T+2, T+3 settlement models and many payment gateways also have similar timelines. Payment gateways and exchanges are both pass-through models so reconciliation is required.”

Possibly to start with, Patel says, the settlement can be done on the T+5 day model, which can later be trimmed to T+3. The RBI’s new norms also say that lenders on the P2P platform must give their consent to all borrowers who will receive lenders’ funds.

“Now if a lender has to transfer ₹1 lakh, she will have to choose all borrowers for the amount in one day. ₹1 lakh is disbursed to multiple borrowers, sometimes even 100 borrowers on the same day, which is very impractical,” said one of the officials quoted above.

“Repayments happen daily and lenders don’t want cash to come into account every day. Firstly it is very costly, and for the lender and the P2P platform to reconcile every transaction becomes a challenge. We will appeal to the RBI to re-think these aspects,” he said.

The Association of P2P lenders is currently working to send a representation to the regulator regarding the new guidelines and will meet the RBI officials soon, sources say.

A few industry players also say that the RBI, before introducing any new guidelines, forms a working group, that proposes draft guidelines, which are then made public for stakeholder consultation, following which the final guidelines are issued. In the August 16 circular, however, no such process was followed, they say.

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