Why RBI Cracked Down On P2P Lending

Following a review of peer-to-peer (P2P) platforms, certain issues -- including high non-performing asset levels, significantly high balances in escrow accounts, and non-compliance with net owned fund and disclosure requirements -- came to the RBI's attention.

A series of regulatory violations, including acting like ponzi schemes, accepting deposits without authorisation, and concerns about coercive recovery practices, prompted the Reserve Bank of India to crack down on these players, sources aware of the development said.

Sources said that following a review of the operations of peer-to-peer (P2P) platforms, certain issues -- including high non-performing asset levels, significantly high balances in escrow accounts, and non-compliance with net owned fund and disclosure requirements -- came to the regulator's attention.

The violations of regulatory guidelines were confirmed through supervisory scrutiny, and the regulator dealt with some of these platforms bilaterally for remedial action.

According to sources, the operating model of P2P lenders, which was reviewed by the regulator, revealed that these platforms provided lenders with the option to recall their funds prematurely by replacing them with new lenders who did not have visibility into the existing lenders they would replace or the loans they were taking over.

This kind of operating model, where lenders do not bear the entire risk of non-repayment of principal or interest or both, is akin to ponzi schemes, sources said, which prompted the regulator to tighten the norms.

The RBI norms had made it clear that a non-banking financial company (NBFC)-P2P should act as a specialised non-deposit-taking NBFC that can act only as an intermediary connecting borrowers and lenders without assuming any credit risk, which is to be borne by the lenders only.

Another concern was that while the lenders on the platform were paid a tenure-linked fixed rate of return, there was no cap on the interest charged from the borrowers.

As a result, the platforms were earning their income from the spread between the returns paid to the lenders and the interest charged from the borrowers, like any other traditional lender.

"In effect, these platforms were acting like traditional banks or deposit-taking NBFCs without obtaining the required licence," sources said.

There were also regulatory concerns that since lenders on the platforms are not regulated by any regulator and have access to personal details of the borrowers, the possibility of harsh recovery practices could not be ruled out.

Borrowers also do not have any recourse to customer protection measures.

It was also found during regulatory scrutiny that funds transferred by the lenders were not disbursed to the borrowers immediately but were kept in escrow accounts for a long period.

"Even though the funds were held in the escrow accounts, the NBFC-P2P operating these escrow accounts was giving an assured return even when funds were not lent and profited from the difference between the actual interest earned on monies lent and the assured interest paid," said a source.

While it was argued by these players that they are promoting financial inclusion, there was no data to indicate that the borrowers on the platform are predominantly 'new to credit' borrowers.

The scrutiny found several instances of borrowers being charged exorbitantly high rates of interest on these platforms.

"There was also apprehension that the appeal of high assured interest rates, coupled with immediate liquidity options and perceived lower risk, could potentially divert deposits and capital away from banks and other similar financial institutions," the source said.

While tightening the norms for P2P lenders last week, the regulator barred them from taking credit risk and offering credit enhancement while capping aggregate exposure at Rs 50 lakh.

In October 2017, the RBI issued norms for NBFC-P2P lending platforms, which were aimed at providing an online marketplace for the participants involved in P2P lending.

It was indicated that these platforms are not allowed to accept public deposits, nor can they lend on their own or arrange a guarantee for the lenders on the platform.

Feature Presentation: Ashish Narsale/Rediff.com