MUMBAI: The fledgling peer-to-peer (P2P) lenders are in shock and stare at a bleak future after the Reserve Bank of India came down hard on them over the weekend for a slew of violations.
P2P lending is a form of financial technology that allows people to lend or borrow money from one another without going through a bank.
The industry feels that there is no incentive for them to continue in the business that has around Rs 20,000 crore in assets under management, or for new non-banks to enlist them as nobody can make any money with the new rules.
A senior executive at one of the top three P2P lending platforms told TNIE that what the regulator did last Friday was a complete surprise and came at a time when the industry was about to spread its wings.
On August 16, the Reserve Bank issued a revised master circular on regulations for P2P lenders, tightening the 2017 norms by barring them from credit enhancement, assuring guaranteed returns and prohibiting them from selling insurance products. The regulator also said the T+1 transactions mandate must be adhered to.
“It has been observed that some of these platforms have adopted certain practices which were violative of the provisions of the master direction, 2017,” the Reserve Bank said in the new circular.
"Such practices include, among others, violation of the prescribed funds transfer mechanism, promoting peer-to-peer lending as an investment product with features like tenure linked assured minimum returns, providing liquidity options and at times acting like deposit takers and lenders instead of being a platform," the regulator added.
The P2P executive quoted above, seeking anonymity, also said the RBI’s fear that some P2P platforms were hoarding 100s of crores of rupees cannot be true as there is no incentive for them to keep the money any longer than needed in a non-interest-bearing escrow account.
“Why should we pay interest out to NBFC partners from our own pocket so that we can keep the cash in our accounts? It makes no financial sense for anyone to do so as it gets us no interest at all,” he said.
Moreover, on any given day the average balance in these escrow accounts could be around Rs 3,000 crore as the money keeps coming in and going out.
Though there are 26 P2P lending platforms registered with the RBI, but over 80 per cent of the business is controlled by the top four players, which include Lindenclub, The Lendbox, Faircent and Liquyloans, he said, adding that only around 15 are active.
An executive from an NBFC, which has empanelled a few P2P players, said on condition of anonymity that the RBI acted the way it did as it has found that some of them acting as deposit-taking NBFCs. It has also been found, he said, that some P2P platforms reaching out to customers and taking deposits offering higher returns, which is in clear violation of the rules. Moreover, in the event of a default another borrower, the depositor would have lost his entire money.
The first P2P lender cited above claims that his platform has over 50 lakh borrowers and has tie-ups with ICICI Bank, Yes Bank and RBL Bank. While he makes 7-8 percent gross margin by co-lending, these banks/NBFCs on average pocket 10-11 per cent as the loan pricing is around 20 per cent now.
Another industry official, who also wished not to be named, said the Reserve Bank has not heard them in the past six months, but admitted that they had been engaged for a year before that. He also denied the industry meeting the RBI again, saying our request for a meeting has not been accepted by the regulator.
The P2P lending platforms umbrella lobby the Association of P2P Lending Platforms, could not be contacted for comments.
Both these executives said new regulations are very detrimental to the industry and make the whole business unattractive for everyone as they suck away liquidity, and disincentivising as a whole.
The new norm for T+1 (the date on which the fund is received in these escrow account) will force a lender to do multiple transactions leading to reconciliation challenges. Also, the pricing is not in line with the lenders’ portfolio and it completely disincentivises the business.
Now we are asked to transfer all repayments on the same day. This causes a lot of reconciliation challenges. Also, the new direction that all lenders have to manually select each platform and their borrowers, sounds very impractical from an execution perspective and illogical as we are a digital platform. All these make it completely unattractive for any new lender.