RBI Guidelines to Bring Rapid Growth to P2P Lending Platforms
P2P lending model is not only present in India but also in many countries globally and it is growing steadily and getting acceptance as an alternative source of getting money quickly when required and that without much of a hassle.
According few reports in the last week of June 2017 finance ministry has said that the banking sector regulator Reserve Bank of India is in the final stage of creating norms for Peer-to-Peer (P2P) Lending platforms in the country and it is likely that it will release the final guidelines for the same in next few weeks’ time (Sometime in July or August 2017). This development is certainly going to bring rapid growth for P2P lending platforms in the country which will come under government regulation through RBI bringing the much needed transparency and making P2P model more robust, legitimate and most importantly trusted financial player under the non-banking financial Companies(NBFCs) as currently there is no law to govern this space And If the sector is left unregulated altogether, there is the risk of unhealthy practices being adopted by one or more players, which may have deleterious consequences. Once final guidelines are released and enforced it is expected that the P2P lending platforms will see a surge in business and most likely to grow many fold in next few years as it will ensure all the companies operating under this model either shape up or ship out as there will be no room to hide from the regulator and operate as per their convenience.
Leading P2P lending players have been demanding to bring the industry under regulation for many months and the government too saw the potential offered by P2P model to fulfil the needs of the common man looking for small to medium size loans. The guidelines likely to cover various aspects, to ensure P2P benefits both the borrower as well as the lenders, which may include minimum capital of Rs 2 crore, who can qualify for P2P model and what kind of activities they are allowed to conduct under P2P model, criteria for borrowing and lending, confidentiality of the customer data and data security norms and business continuity plans.
Last year RBI had come out with a consultation paper for P2P model wherein they suggested a glimpse of regulatory framework to regulate this model. At the end of the paper it also sought few questions from various stakeholders to ensure bringing robust regulatory guidelines after consulting all the parties involved and help the sector to not only get formal regulatory platform but also help it grow to its potential as everyone will have to operate as per the rules and regulations set by the regulatory body. It is believed that the RBI may create a separate category for P2P lending businesses within the category of NBFCs as the Central Bank had followed a similar approach for regulating microfinance companies. Once the RBI issues guidelines and lays down a regulatory framework, there will be a level playing field available to all players. At present, there are no set rules.
P2P lending model is not only present in India but also in many countries globally and it is growing steadily and getting acceptance as an alternative source of getting money quickly when required and that without much of a hassle. However, currently it is an unregulated sector in the country making it slightly risky for both lender and borrower and hence the need for regulation.
With internet and smartphone penetration, the P2P lending model has seen encouraging growth and several entities have mushroomed in last few years, however, many of them are standing at a tipping point. Industry experts believe that clear guidelines and a well-defined regulatory framework will help the sector grow by leaps and bounds and it will also help in curbing malpractices adopted by some players. On a similar line, the RBI also articulated the rationale of regulating P2P business.
In its consultation paper on P2P model, RBI has noted that “Considering the significance of the online industry and the impact which it can have on the traditional banking channels/NBFC sector, it would be prudent to regulate this emerging industry. In its nascent stage, this industry has the potential to disrupt the financial sector and throw surprises.”
Once the RBI starts overseeing the sector, P2P lending platforms will become more diligent in reporting numbers. So be it gross disbursal made through the platform or number of accounts that dishonored EMIs, P2P lending enterprises will have to maintain complete records. The RBI will prescribe mandatory disclosures along with the reporting format. This will not only standardize the process under review but also make crucial data available to the public as a whole. Once P2P lending activities come in the mainstream, credit rating agencies will also start accounting for the credit history of a person even on a P2P lending platform while providing him/her a credit score. Tracking borrowers’ credit behaviour will become easy. Nonetheless, this shouldn’t be considered a dead-end in the regulating the sector.
The RBI is most likely to place a restriction that all the borrowing-lending transactions should happen among lenders and borrowers directly via bank-to-bank transfers. Account-to-account transfers among lenders and borrowers will create a hurdle and it will restrict the growth of P2P Lending platforms as it will operationally become impossible to track and managing payments done without keeping P2P Lending platforms in loop. We believe that this will be taken care of by the regulator while creating final guidelines.
Some of the learnings from the global market indicate that the success of any P2P lending model is depend on rigorous risk management procedures and strict norms and the same applies to India and we believe that once the government announced the regulatory framework and clear guidelines P2P lending business will see a strong position and robust growth in next couple of years.
Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house
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