Why is India tightening oversight of P2P lending?

Written by Kapronasia || May 14 2024

In the past six months, Indian regulators have been active tightening regulation of fintechs in different industry segments. The most notable action came earlier this year with the effective shutdown of Paytm Payments Bank. It is hard to say exactly why the Reserve Bank of India (RBI) is taking a harder line – but we suspect it may have something to do with the industry reaching a certain stage of development and the RBI believing that once they have been allowed enough space to grow, digital finance companies should be bound by similar constraints as incumbent financial institutions.  One of the areas where they are focusing their attention is peer-to-peer (P2P) lending.

India’s P2P lending market is estimated to be worth several billion US dollars, though there does not seem to be an authoritative figure for the market size – perhaps because information about some of the providers is not easy to gather. Research firm Markets & Data estimates that the market is currently worth US$2.78 billion and will grow at a 15% compound annual rate to reach US$8.51 billion in 2032. Research firm IndustryARC is more bullish, predicting the market will exceed US$10 billion by 2026.

While it is hard to say exactly how large the market is, there is no doubt it is significant – and for that reason, we can expect more scrutiny from the RBI. Earlier this year, India’s MoneyControl reported that the RBI has been requesting information about customer onboarding from P2P lenders. One industry source told the publication that “some of the norms are misinterpreted and incorrectly followed, which we are changing.”

This action by the RBI occurred in tandem with comments by the Indian central bank’s deputy governor M Rajeshwar Rao. “Of late, some of the business practices of NBFC-P2Ps do not appear to be in line with the regulatory guidelines,” Rao said at the NBFC Summit organized by Confederation of Indian Industry at Mumbai. The RBI seems to be concerned with inadequate risk knowledge among the many individuals who are providing funding for credit on some P2P platforms. Further, it appears that some P2P lending firms are underplaying related risks by promising lucrative – but unrealistic – returns.

Given the RBI’s stance towards P2P lending, the industry is in a wait-and-see mode. In some cases, platforms have downsized their partnerships with large consumer-facing companies and experienced a slowdown in growth. Among leading P2P lenders, LenDen Club has partnerships with Karza, BharatPe, and PhonePe, while Liquiloans has collaborations with BharatPe, Cred, Avail Finance, and Uni, among others.

We do not expect to see in India a large-scale crackdown on P2P lending akin to what China experienced, with the ultimate elimination of the industry. Nor do we expect to see the introduction of regulations that discourage industry development as India has done for cryptocurrency. Rather, we expect that P2P lending platforms will be more regulated more like incumbent financial institutions in the future and will have to accept more modest growth.