RBI’s new rules for P2P platforms: A net positive for lenders, borrowers, say experts

Industry had anticipated certain amendments in the guidelines given the rigorous audits the RBI had undertaken for P2P platforms over the last few quarters.

Soon, lenders and borrowers on the so-called Peer-to-Peer (P2P) lending platforms might have better clarity and transparency.

The Reserve Bank of India (RBI) has recently issued amended guidelines for P2P platforms. The revised guidelines clarify the activities that non-banking finance companies (NBFCs) cannot undertake in the P2P business, including the assumption of credit risk. The aim is to curb the irregular practices in the industry.

What are P2P lending platforms?

P2P lending allows individuals to lend to others through RBI-regulated NBFC platforms by matching lenders and borrowers on their platform. The platforms act as intermediaries, facilitating transactions and managing repayments for a fee.

These platforms offer loans for short-term requirements. They could be for a medical emergency, a business loan, a travel loan, or for repayment of credit card dues, home renovation, or for such other needs.

A segment of borrowers finds it easier to borrow from P2P platforms than from banks and NBFCs as the processing and disbursement are quicker.

While P2P platforms are concerned with the restrictions they will have to face, independent experts say borrowers and lenders will benefit in the long run. The industry had anticipated certain amendments in the guidelines, given the rigorous audits the RBI had undertaken for P2P platforms over the last few quarters.

“The amended guidelines promote transparency and restrict violations of the existing 2017 master directions,” says Suhana Murshedd, Partner, AQUILAW.

Some of the popular P2P-NBFC platforms affected by the amendments are LenDenClub, Liquiloans, Lendbox, Faircent and Finzy.

No credit guarantee or enhancement by NBFC-P2P entities

Credit guarantees provided by the partners of NBFC-P2P entities were fraught with risks. They tend to offset the actual delinquencies, and, therefore, paint a rosier picture of P2P platforms’ portfolio performance.

“This can mislead lenders, especially if their investments may not have been covered under any such guarantee,” says Parijat Garg, a digital lending consultant.

Now, the revised guidelines clearly state that NBFC-P2P lending platforms are not allowed to assume any credit risk – meaning they cannot take responsibility for any losses that might occur if a borrower defaults. This will ensure that lenders have a better understanding of the risks they are dealing with as they are solely responsible for losses due to defaults.

“This makes it clear to the lenders that any reliance on the platform’s guarantees are not backed by law,” says Akshat Pande, Managing Partner, Alpha Partners.

“This makes it crucial for lenders to carefully assess the creditworthiness of borrowers before lending,” says Debashree Dutta, Partner, Vritti Law Partners. With clear disclosures, lenders can choose to lend only to borrowers whose creditworthiness aligns with their risk appetite, and not engage in reckless lending behaviour.

Also read | Millennials comprise largest segment of active users on P2P platforms

Fund transfer through an escrow account

Earlier, NBFC-P2P lending platforms were required to maintain two escrow accounts - one for funds from lenders pending disbursals and another for collections from borrowers, with no specific timeline for fund transfers.

The amended regulations allow the two-escrow-account structure but with stricter guidelines, mandating that funds in these accounts be transferred within one day (T+1) of transaction (where 'T' is the date of receipt).

“Additionally, funds in the lenders’ escrow account can only be disbursed to borrowers, and funds in the borrowers’ escrow account can only be used for repayments to lenders, ensuring stricter segregation and timely processing of transactions,” says Dutta.

“The requirement of T + 1 settlement for payment from escrow account may be difficult to manage at a micro level and a gradual introduction of such stringent timelines may be more appropriate,” says Shrishail Kittad, Partner, IndiaLaw LLP.

Also read | Peer lending blow: Some P2P platforms freeze new transactions, industry to meet RBI this week to seek clarity

Restriction on cross-selling of products

The restriction on cross-selling by these platforms, except for loan-specific insurance products, will reduce conflict of interest.

Previously, some NBFC-P2P lending platforms were cross-selling products like credit enhancement and loan protection insurance, which could mislead lenders and burden borrowers.

“By prohibiting these practices, the RBI has ensured that the platforms focus on their core function of matching lenders with borrowers, without pressuring users into purchasing unnecessary or complex products,” says Dutta.

Cap on amount lent

In 2019, a cumulative lending limit of Rs 50 lakh for individual lenders across all P2P platforms was introduced. Furthermore, lenders are required to provide a net-worth certificate, if their lending exceeds Rs 10 lakh.

“The amended guidelines do not introduce a new cap on the aggregate exposure but amend the language of the provision to bring it in line with the RBI's digital lending guidelines,” says Amey Pathak, Partner (Head - Banking), Cyril Amarchand Mangaldas.

However, the implementation on the ground may not be easy. “We don’t have any tool to check if a particular lender has lent the amount to another P2P platform and verify the lender's net worth. Seeking more clarity from the RBI on how we can do this,” says the founder of a P2P platform on the condition of anonymity.

Also read | Indian P2P players should learn from Chinese debacle, RBI has just pressed a warning button

Board-approved policy to match lenders and borrowers

Instead of a pool of borrowers from a closed user group, the RBI has asked P2P platforms to match or map the borrowers to lenders as per a board-approved policy. “Board approval will have a better governance model,” says Bhavin Patel, Founder & CEO, LenDenClub, a  P2P lending platform.

“This will bring more responsibility on the board of the P2P platform and ensure a more balanced recommendations to the lenders,” says Garg. The lender would otherwise never know whether the borrowers suggested by the P2P platform were the best fit as per the lender's criteria for lending out, he adds.

Monthly portfolio performance and NPA disclosures

“Earlier, NPA disclosure norms varied with P2P platforms,” says Patel. P2P platforms shall now have to disclose actual losses in terms of principal and/or interest lost every month. This will be beside the non-performing asset (NPA) numbers and the pre-NPA delinquencies.

“This will allow lenders to make more informed decisions,” says Rajesh Sivaswamy, Senior Partner, King Stubb & Kasiva, Advocates and Attorneys. The lenders will have better information to decide on before lending out, and also to track their portfolios.

“However, if the RBI can prescribe a standardised format and terminology across P2P platforms, it will be easier for lenders to compare the portfolio performance across the platforms,” Garg adds.

Revised fee structure of P2P platforms

All the P2P platforms currently charge fees as per the collection efficiency of the platform.

As per the amended guidelines, the fees will be either a fixed amount or a fixed percentage of the principal amount involved in the lending transaction and will not be contingent upon the borrower's repayment performance. The lender will have to disclose the fees that they are liable to charge at the time of lending itself.

“Although what all the P2P platforms were doing was in the best interest of the lender, since the RBI has told the platforms to just charge a fixed fee instead of charging collection efficiency fee, we'll have to tweak the fee structure accordingly,” says a founder of P2P platform on the condition of anonymity.