The RBI’s proposal for P2P lending: a flawed approach?

Written by Ketan Warikoo || May 11 2016

India’s banking regulator, the Reserve Bank of India (RBI), recently released a consultation paper on P2P lending in India. This paper aims at regulating India’s fledgling P2P ecosystem, demonstrating that the RBI is positively besieged with the concerns and realities of this nascent industry.

P2P lending is important for India- close to 78% of population of India is unable to secure loans from traditional banks or even NBFCs. Barring workers from multinational companies or large Indian firms, salaries remain low with most employees not earning enough to be considered creditworthy. P2P lending is well poised to address this gap in the market, by considering credit worthiness of the borrower without overly relying on credit reports and also giving weightage to social parameters.

20160511 india P2P lending

With as many as 30 companies setting up shop in a short span of 2 years, P2P loans are on the rise. The driving factors for the growing number of P2P loans are are:

  • Lower interest rates, less fees
  • Quick disbursal time, less documentation
  • Easy access to credit for those with no or poor credit history

However, all is not well on the regulatory front. While RBI’s intent is to protect lenders as well as borrowers, P2P startups are especially not happy with the RBI’s demand for a mandatory leverage ratio. A leverage ratio is more suited for banking organizations that have raised capital on their own books. P2P lending companies are only marketplaces where a lender finds a borrower and vice versa, making the platform an aggregator of sorts. Since the ‘deposits’ are not with the P2P platform, it makes little sense to prescribe a leverage ratio; even the RBI seeks to classify P2Ps as intermediaries.

Another key concern is a proposed requirement of $3 million capital for P2P lending companies. Such a stipulation might prove to be a barrier for new entrants, especially those focussed on social causes. It seems RBI’s enthusiasm to regulate has pushed it to slap on rules meant for banking onto P2P providers. If this is indeed the case, the final regulations might herald a swansong for P2P lending in India.

Incidentally, recent coverage of Renaud Laplanche’s (CEO-Founder, LendingClub and long considered the poster boy of P2P lending) removal from his post indicates the trust challenges faced by the P2P industry. Laplanche was removed as he failed to make disclosures related to certain investments as well as contributed to critical governance failures. To ensure that the consumer as well as investors trust P2P lending, the RBI needs to step in and set some ground rules, which will hopefully help the sector grow. Encouragingly, most Indian P2P lending companies welcome the RBI’s efforts to regulate the sector.

As part of our research on this growing ecosystem, Kapronasia will soon come out with a detailed report on P2P lending in India later this year.