After the Reserve Bank of India’s clampdown on peer-to-peer (P2P) exchanges in August this year, the industry’s asset under management (AUM) plummeted by 35 per cent — from an estimated ₹10,000 crore to ₹6,500 crore. No surprises there, since the RBI’s restrictions targeted features that were most attractive to potential investors — tenure-linked assured minimum returns and liquidity options — apart from mandating T+1 settlement cycle.
A P2P platform’s role is limited to facilitating transactions between lenders and borrowers without participating directly in the lending or borrowing process.
While opinions differ on the industry’s ability to comply with the new norms, businessline takes a look at the past, present and likely future of P2P lending in India.
Informal lending
Talk of regulating P2P lending first emerged in 2016, to curb informal moneylending. Citing the global pickup in P2P lending and newer entrants in India, the RBI floated a discussion paper on whether regulation was needed or not.
The arguments against included inadvertently lending credibility to P2P lending, with the stamp of regulation; stifling growth; and the absence of any immediate systemic risk from the nascent sector.
Those calling for regulation argued that P2P lending cannot be overlooked owing to the growing potential of online trading; P2P lending caters to underserved borrowers and, if regulated, it can facilitate cheaper loans for such borrowers more effectively; if left unregulated, the sector may be riddled with unhealthy practices.
After the feedback from stakeholders, the RBI in 2017 issued master directions on P2P lending in India, specifying the scope of activities for the lenders, eligibility criteria, and transparency and pricing disclosure requirement, among other norms.
What went wrong?
According to an RBI official, who requested anonymity, P2P exchanges began acting like a bank, drawing the ire of the regulator. They pocketed the spread between the borrowing rate and the interest that a lender charged on the platform.
“They were brought on board to curb moneylending, but started acting more like a bank than an exchange. Features like instant withdrawals, fixed withdrawals made investors feel there is no credit risk to the instrument,” the official says. The RBI’s restrictions soon followed.
The regulator declared that P2P exchanges cannot utilise the funds of one lender to replace those of another, effectively killing the secondary market. It also stressed that P2P players must disclose their fees at the time of lending.
The RBI also disallowed the practice of matching and mapping participants within a closed user group, whether through an outsourcing agency or otherwise.
What lies ahead?
There are divergent views on the likely future of P2P lending in India. A large P2P exchange has stopped onboarding new customers since August 16, leading to 30-35 per cent loss in AUM, an official said.
“RBI officials are visiting our offices to assess whether we are in compliance with the new norms. If some of the secondary market features are not revived, the industry may see a sharp fall in volumes. Large players like us are thinking of giving up the licence,” a company official said.
But not all are pessimistic.
Bhavin Patel, founder and CEO, LenDenClub, argues that in any regulated business some players will push the boundaries till the industry reaches product-market fit.
“Before the guidelines were announced, many young entrepreneurs, including technocrats, participated in this segment. In the US and Europe market, too, young players pushed the boundaries until regulators stepped in,” he says, adding this was common in Southeast Asian countries like Indonesia, Vietnam and Thailand, too.
While customers looked for products with liquidity, re-investment, automated selection of borrowers, and secondary market of loans, among other features, the RBI is wary of premature loan exits.
“We were never into liquidity on our platform. We also immediately halted the secondary market product we had with one partner,” Patel says.
“Auto-lending was discontinued, as it needed flow change, but this did not affect customers,” he says.
Neha Juneja, CEO, IndiaP2P, says the exchange enables finance for women running small businesses, avoiding usurious moneylenders.
“We made adjustments to technology and staff training, and relaunched a few weeks ago,” she says.
“I think the RBI wants the industry to take a different direction. While investor sentiment is low, P2P players have to rebuild trust,” she says.