Reserve Bank of India P2P Lending Guide www.deekpay.com

Peer-to-peer (P2P) lending has becomeIndiaImportant alternatives to traditional banking channels provide individuals with a platform to borrow and lend directly without bank intervention. As these platforms grow in popularity, strong regulation is also needed to ensure transparency, fairness and protection for both borrowers and lenders.Reserve Bank of IndiaRecognising the potential and risks of P2P lending, it has been proactive in establishing a regulatory framework to govern the industry.RBI Updated guidance has been issued that aims to improveNon-Banking Finance Corporation of IndiaTransparency and Compliance for Peer-to-Peer Lending Platforms (NBFC-P2P Lending Platforms). These amendments are intended to address the changing dynamics of the P2P lending sector and to curb behaviour that could undermine the stability and integrity of the financial system.

Overview of Revised RBI Guidelines on P2P Lending

The Reserve Bank of India's updated guidelines for P2P lending platforms have introduced several key changes aimed at improving transparency, safeguarding the interests of lenders and borrowers, and ensuring that P2P platforms operate within a clear regulatory framework. These guidelines were developed after observing certain unregulated practices in the industry that violated previous regulations. The revised guidelines focus on several key aspects of P2P lending, including prohibition of credit guarantees, stricter fund transfer rules, restrictions on cross-selling and enhanced disclosure requirements. These changes are expected to result in a more transparent and accountable P2P lending environment in India.

Recommended Reading:Reserve Bank of India RBI

Revised P2P Lending Guidance Notes

NBFC-P2P entities do not provide credit guarantees or add value

One of the most significant changes in the revised guidance is the prohibition on NBFC-P2P entities offering credit guarantees and adding value. Previously, some P2P platforms offered credit guarantees to give lenders the peace of mind that they would be rewarded even if the borrower defaulted. However, this practice was risky as it tended to mask the true level of late/missed payments and gave a misleading picture of the platform's portfolio performance. The Reserve Bank of India now explicitly prohibits NBFC-P2P entities from taking on any credit risk, meaning they cannot offer any form of credit guarantee. This shift puts the onus of risk squarely on the lender to ensure that they are fully aware of the risks involved in P2P lending. For borrowers, this may mean higher interest rates as lenders take into account additional risks, but it also means a more transparent and realistic assessment of their creditworthiness.

Transfer of funds through escrow accounts

Another important update in the RBI guidelines relates to managing funds through escrow accounts. Previously, NBFC-P2P platforms were required to maintain two escrow accounts - one for holding the funds of the lenders to be disbursed and the other for holding the borrowers' money. However, there was no strict timeline for transferring funds between these accounts, leading to potential delays and inefficiencies. The revised guidance now requires that funds in these escrow accounts must be transferred within one business day (T+1) of receipt. This requirement is intended to improve the efficiency of fund transfers and reduce the risks associated with delays. For lenders, this means faster access to funds, and for borrowers, it means faster disbursement of loans, which is critical in cases of urgent funding needs.

Loan Amount Caps and Net Worth Certification Requirements

RBI has also laid down stricter rules on the amount that an individual lender can lend through P2P platforms. As per the updated guidelines, the cumulative loan limit for all individual lenders on P2P platforms has been restricted to Rs 5 lakh. Further, lenders wishing to disburse loans of more than Rs 1 million on P2P platforms will now be required to provide a net worth certificate from a chartered accountant confirming that their net worth is at least Rs 5 million. These measures are aimed at ensuring that lenders do not overextend their finances and that they have the financial backing required to cover potential losses. The cap will also help maintain balance in the P2P lending market by preventing the concentration of risk in a small group of lenders and promoting wider participation.

Product cross-selling restrictions

The revised guidance also imposes restrictions on the cross-selling of products on P2P platforms. Specifically, NBFC-P2P entities are now prohibited from cross-selling any products other than loan-specific insurance products. The move is intended to reduce conflicts of interest and prevent platforms from offering borrowers additional products that may not be in their best interests. Previously, some platforms had been offering credit enhancement products and loan protection insurance, which, while potentially beneficial, also carried the risk of misleading lenders and increasing the financial burden on borrowers. By restricting cross-selling, the Reserve Bank of India aims to ensure that P2P platforms remain focussed on their core function of facilitating lending and that borrowers are not forced to purchase unnecessary additional products.

Monthly portfolio performance and non-performing assets disclosure

In an effort to increase transparency, the Reserve Bank of India has asked P2P platforms to now disclose their portfolio performance on a monthly basis, including details of Non-Performing Assets (NPAs) and any pre-NPA arrears. This requirement is expected to give lenders a clearer picture of the risks involved in lending on a particular platform. Regular disclosure will also enable lenders to make more informed decisions as they will have access to up-to-date information on the performance of the platform's loan portfolio. For borrowers, this could lead to more competitive interest rates as lenders adjust their risk assessments based on the disclosed data. Emphasising transparency is a key step in building trust in the P2P lending ecosystem, which is essential for its long-term growth and sustainability.

Revised P2P platform fee structure

RBI has also revised the structure of service charges that can be charged by P2P platforms. Under the new guidelines, the fee must be a fixed amount or a fixed percentage of the principal amount involved in the loan transaction and cannot be dependent on the repayment performance of the borrower. The change is intended to ensure that P2P platforms are fairly compensated for their services, while also preventing them from taking on additional risk by tying fees to loan performance. For lenders, this means greater clarity and predictability around the costs associated with using a P2P platform. It also ensures that platforms have an incentive to focus on facilitating loans efficiently and effectively, rather than maximising their fee income through risky lending practices.

Industry Reaction to Revised P2P Lending Guidelines

These measures have triggered a strong reaction from industry members, who are now considering approaching the central bank for modifications and clarifications.

Concerns about T+1 settlement rules

One of the main concerns raised by P2P lending platforms relates to the new requirement for lenders and borrowers to clear funds in escrow accounts within one day (T+1). Many in the industry consider this rule to be too strict. The P2P Lending Platforms Association, which represents the interests of these platforms, plans to ask for this to be extended to T+2 or even T+3 days. They argue that deploying funds within one day poses practical challenges, which could hamper their operational efficiency.

Intent behind the statute

RBI's regulations aim to safeguard the interests of lenders by ensuring that their funds do not remain on the P2P platform. From a lender's perspective, this is a positive move as it ensures that their funds are returned in a timely manner once the borrower repays the loan. This measure is seen as a step towards reducing the risks associated with P2P lending as it prevents platforms from holding on to lenders' funds for long periods of time.

Current size of the P2P lending industry in India

The Indian P2P lending industry is currently valued at around Rs ₹7,000-8,000 crore. There are around 20 P2P platforms in the country, all registered with RBI as Non-Banking Financial Companies (NBFCs). These platforms generate revenue through registration fees, processing fees and charges collected during repayment.

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concluding remarks

The latest update to the RBI P2P Guidelines marks a significant step forward in the regulation of the P2P lending industry in India. By addressing key issues such as credit risk, fund management, cross-selling and transparency, RBI is working to ensure that P2P platforms operate fairly, transparently and in the best interests of all participants. While these changes may initially pose challenges for some platforms, they are ultimately designed to promote long-term stability and growth in the P2P lending market. As the industry continues to evolve, these guidelines will play a key role in shaping its future, ensuring that it remains a trusted and reliable option for Indian lenders and borrowers.

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