RBI deputy governor Rajeshwar Rao cautions NBFCs on P2P lending practices

Rajeshwar Rao

The Reserve Bank of India (RBI) deputy governor M Rajeshwar Rao has cautioned non-banking finance companies (NBFCs) on peer-to-peer lending, saying the regulator has observed certain business practices that do not appear to be in line with its guidelines.

Any breach of licensing conditions and regulatory guidelines is non-acceptable, he said. The warning comes days after the RBI imposed business restrictions on Paytm Payments Bank.

“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 organised by Confederation of Indian Industry at Mumbai.

A large proportion of lenders on NBFC-P2Ps are individuals and not expected to be well-equipped to understand the risks involved in providing credit.

Instead of educating the lenders about the inherent risks in the lending activity, NBFC-P2Ps have been observed to underplay the risks through various means such as promising high/ assured returns, structuring the transactions, providing anytime fund recall facilities, etc.

On January 31, the RBI imposed major business restrictions on Paytm Payments Bank, including a bar on accepting fresh deposits and doing credit transactions after February 29.

Business restrictions imposed on Paytm Payments Bank were a specific issue and there was nothing to worry about the entire system, Governor Shaktikanta Das said on February 8 as he addressed queries on the RBI's move in post-MPC press meet.

NBFC regulations

The regulations for NBFCs, especially in the upper layer, were much more calibrated and certainly not on par with those of banks, Rao said.

"It is agreed that the regulations between banks and NBFCs have been harmonised in some areas and regulations for certain NBFCs especially upper layer NBFCs have been strengthened under Scale Based Regulatory framework significant differences continue to exist between the regulations applicable to banks and NBFCs," Rao added.

Driving home the point, he said minimum initial capital requirement for a universal bank was Rs 1,000 crore compared to Rs 10 crore for an NBFC. Banks cannot engage in any activities other than those which are specifically provided in regulations but there was no such provision under RBI Act governing NBFCs .

It was often argued that the regulatory capital requirement of NBFCs was higher at 15 percent as compared to 9 percent for banks. However, it should be noted that banks’ capital requirement comprises of credit, market and operational risk capital charges, whereas for NBFCs, the capital requirement was based only on credit risk capital charge, Rao said.

Deposit acceptance

The RBI deputy governor said it was the non-acceptance of public deposits by the NBFCs, which provided the regulatory comfort to the Reserve Bank to have lower entry barriers for such players, allowing them to specialise in any specific sector of their choice and lower exit barriers to wind up their businesses.

Acceptance of deposit, in whatever manner and form, necessitated a macro financial safety net, including deposit insurance and central bank liquidity backstop. These safety nets come with increased regulatory rigour and intense supervisory oversight, Rao added.