Exclusive: RBI said to up scrutiny of P2P lenders, asks platforms to share financial data

After digital lending, P2P lending has come on the RBI’s radar as some platforms were observed to be working outside the preview of the guidelines, including flaws in the KYC process.

The Reserve Bank of India (RBI) has increased scrutiny of peer-to-peer (P2P) lending platforms after they were said to have flouted guidelines by underplaying risks through promises of high or assured returns.

The central bank sent out emails to a few platforms last week, seeking information about their onboarding process, customer profiles, agreements with lenders, IT systems, and so on, three people with knowledge of the matter told Moneycontrol. This includes details on returns filed, assets under management and financials.

“Everyone was given a 24-hour deadline to respond,” said one of the founders who received the email from the regulator.

After digital lending, P2P lending has come on the RBI’s radar as some platforms were observed to be working outside the preview of the guidelines, including flaws in the KYC process.

The regulator has engaged with all licensed platforms via email, besides conducting supervisory visits at their offices in New Delhi and Mumbai since September. Post-reviews, corrective measures were handed out to individual firms, which continue to engage with the RBI.

The latest communication, however, is restricted to those that are yet to implement the changes as directed by the RBI or have not submitted satisfactory details, said the founder of another P2P lending platform.

“We had been in touch with the RBI since last year. They have been seeking details on customer onboarding, what are the lender agreements, partnerships with other apps, and how transactions are structured. Some of the norms are misinterpreted and incorrectly followed, which we are changing,” the founder added.

On the radar

P2P non-banking finance companies are the latest on the RBI’s radar after pre-paid instruments (PPIs) and digital lending. The RBI had laid out detailed regulations for the segment back in 2017, with some revisions introduced in 2019.

This was topped up with FAQs for further clarity.

Besides independently offering products on their respective platforms, licensed P2P-NBFCs such as LendenClub, Lendbox, Liquiloans, Faircent, and Finzy have forged partnerships with apps including BharatPe, Cred, Mobikwik, and Vested Finance to source new customers.

As per consulting firm IndustryARC, the P2P lending market size is forecast to reach $10.5 billion by 2026, at a CAGR of 21.6 percent from 2021.

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With the segment gaining popularity as an alternative investment proposition among borrowers and lenders, the regulator has stepped in to take an overview, which revealed discrepancies. This was amplified by deputy governor M Rajeshwar Rao, who remarked that the regulator had observed certain business practices that do not appear to be in line with its guidelines.

“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. Let me make it clear that any breach of licensing conditions and regulatory guidelines is non-acceptable," he said.

One of the key subject matters irking the regulator is the agreement between the platform and the lender, where the former is required to give all “control points” to the latter to choose the structure of the loan.

This includes details on the borrower's identity, loan amount and tenure, and credit score, which must be given by the platform, followed by a unique agreement for each borrower.

However, some platforms have been practicing otherwise, an industry official said, pooling a large sum from lenders with blanket consent and disbursing loans.

More clarity sought

“P2P-NBFCs have started to act like deposit-taking NBFCs, offering fixed returns to lenders. They have forgotten the line and will have to now face the music,” a banker said.

Asked about checks by the RBI, Bhuvan Rustagi, co-founder of Lendbox, agreed to certain deviations by companies from the RBI guidelines, terming them as “misinterpretations.”

“We have sought more clarity from the regulator on some points. These are hygiene checks and the RBI wants to know how businesses have evolved since 2017,” he said, adding that the firm has implemented 95 percent of the issues pointed out by the regulator and has sought clarity on the remaining 5 percent.

An executive of another firm said on condition of anonymity that they were flagged for “underplaying the risk” of the investment to the lender.

“We never underplayed the risk. There are no guarantees or returns assured. Declarations are duly signed by the lenders, but we have now made them clearer and defined,” he added.

Besides, some P2P-NBFC platforms have allowed lenders to withdraw their funds at any time, a practice not allowed.

“We were guided by the regulator late last year and took immediate steps to stop the product. Now we are offering whatever tenure the lender wants to offer. We changed the construct of the product. There could be other players still doing, and that’s where the governor’s comment comes in,” said Bhavin Patel, co-founder of LenDenClub.

The P2P platform, which tied up with BharatPe to offer loans, said it has run down the portfolio and completely halted the partnership. Consequently, Patel expects some impact on volumes but not on revenue margins because the fee charged remains the same.

Since the scrutiny, a 12-member association of P2P platforms has started to engage with the RBI to discuss the matter and to cut miscommunication. Some of them met with the RBI’s Department of Regulation and Supervision on January 4 to explain their business models, products, and risks.

As stakeholders take a ‘wait and watch’ approach while implementing the corrective measures set out by the RBI, some are anticipating the FAQs to be revised or an additional set of guidelines.

“The RBI never takes arbitrary action immediately. They give ample time to companies to take corrective actions. The conversation (with RBI) has been going in a positive direction so far,” said Patel.