Raghavendra Pratap Singh
In a much-awaited move, RBI issued guidelines to govern peer-to-peer lending or P2P. This is a landmark decision that will go the distance in achieving the objective of financial inclusion. RBI overseeing the sector would put an end to all uncertainties associated with the unregulated lending business. The change in the “perspective” of borrowers and lenders to look upon P2P platforms would be awe-inspiring for many new entrants who would flock their ways to this sunrise industry now. Addressing the industry, RBI has clearly spelt out the eligibility criteria, the scope of activities and has also touched upon operational aspects and business hygiene. For every platform, it would now be mandatory to get a Certificate of Registration (CoR), without which carrying on business activities won’t be possible. RBI has given three months to the incumbents and 12 months to new players for securing CoR. With this, RBI has sent a strong message to non-serious players.
Existing P2P players are permitted to continue the business of a peer-to-peer lending platform till their application for issuance of CoR is rejected. Meeting requirements of the Net Owned Fund of Rs 20 million within three months may create some issues for smaller start-ups and many players are expecting some relaxation in this regard. The biggest positive—as we see it—is that NBFC P2Ps can join hands with credit information companies (CICs). This will open up floodgates to credit information, necessary for accurate evaluation of loan proposals, and will ensure defaulters don’t get away easily.
RBI has put particular emphasis on the transparency aspect, which forces NBFC P2Ps to provide accurate and complete information about their operations. NBFC P2Ps will have to publish portfolio performance, including the share of non-performing assets on a monthly basis and segregation by age, on their website. The disclosure norms about the business activities have been designed to offer safety to existing and potential lenders and borrowers. RBI has provided relief by allowing funds transfer through escrow mechanism but unnecessarily added trusteeship to monitor the transactions. In fact, at i2iFunding, we have been following the practice of routing funds through a separate nodal escrow account since April 2017 and we will add trusteeship to ensure we meet latest requirements.
To begin with, RBI has prescribed a cap of Rs 10 lakh for each lender—meaning one can’t have outstanding investments of over Rs 10 lakh in aggregate across all NBFC P2Ps at one go. Further, a lender can’t lend more than Rs 50,000 to a single borrower across all NBFC P2P platforms. No platform should enlist loans for a tenure of over three years. We are hopeful this advisory is transient in nature, and as the regulator gains hands-on experience of industry players—incumbents and new—it will phase out such restrictions. We also hope the regulator would shed more light on reporting methodology and the expected role NBFC P2Ps will play in the process.
For the time being, RBI has advised NBFC P2Ps not to offer or arrange any credit enhancement or credit guarantee. Against this backdrop, the principal protection fund, which has been an exclusive offering of i2iFunding so far, may need some tweaking. At present, we are neither guaranteeing any compensation from the third-party nor are we making a claim of apportioning our capital for the purpose. Therefore, we will approach the regulator to get more clarity on this and would do our best in the interest of members of the platform. Existing investors need not hit the panic button.
To tame overzealous fund-raising by NBFC P2Ps, RBI has prescribed to maintain the leverage ratio under 2. While it’s a proactive measure taken to avoid overheating of the sector, it may limit expansion plans of those platforms that can handle higher leverage. While RBI has explicitly barred fund flows from outside India, it hasn’t provided enough clarity on whether or not non-individual investors can participate in lending/borrowing activities.
In the wake of ongoing concerns of data breach across industries and geographies, RBI has directed NBFC P2Ps to store and process all data about participants of platforms within India. In the context of data privacy, RBI needs to provide more clarity on how agreements between individual lender(s), recipients and concern parties should be executed without violating existing norms on the subject. On the whole, the regulatory framework and prudential guidelines will create a conducive environment for fostering growth of the sector. The mission of funding the unfunded would get a big boost with RBI guidelines.