How RBI Tightening P2P Lending Norms Will Impact Investors | Mint Money | Neil Borate

Summary

India's P2P lending industry, once booming under a lenient RBI oversight, faces a halt as the central bank awakens to its unchecked growth. The industry, which facilitated lending between individuals through regulated platforms, has been accused of creative interpretations of regulations, including instant liquidity through loan transfers and using interest rate spreads to cover defaults. These practices, now banned, have led to a precarious situation where investors may face withdrawal restrictions, highlighting the risks of an unregistered shadow banking system that thrived due to regulatory slumber.

Takeaways

• 🏦 Peer-to-peer (P2P) lending is an alternative to traditional banking where individuals lend money to other individuals through a regulated platform.
• 📈 The P2P lending industry in India has rapidly grown to approximately 10,000 crores in size with 10 to 15 lakh lenders or investors.
• 🚫 RBI has recently enforced stricter regulations on P2P lending, which may lead to a halt in customer withdrawals due to non-compliance with previous interpretations of rules.
• 🔄 A 'creative' interpretation of RBI regulations allowed for instant liquidity by transferring loans to other lenders, creating a secondary market not intended by RBI.
• 💰 P2P platforms typically offer loans at 18-20% interest rates, giving investors returns of 8-10%, using the spread to cover defaults and maintain a low default rate for investors.
• 🤝 P2P platforms partnered with fintech giants like Paytm and Ked to launch investment clubs, attracting more retail investors and creating an unregistered shadow bank.
• 🚫 RBI has banned the 'closed group lending' facilitated by P2P platforms, where loans were given between users of the same fintech.
• 📉 The new RBI circular has led to a significant industry disruption, as P2P platforms may have to stop withdrawals to comply with the new regulations.
• 🤔 The industry's growth was fueled by creative interpretations of regulations, which RBI has now deemed unacceptable, putting investors at risk.
• 🛑 The halt in customer withdrawals could be a consequence of the industry's inability to comply with the new RBI circular, affecting investor confidence.
• 📚 The situation highlights the need for clear regulations and oversight in the fintech space to protect investors and maintain financial stability.

Q & A

What is P2P lending?

P2P lending, or peer-to-peer lending, is a financial service that allows individuals to lend money to other individuals without the need for a traditional financial intermediary like a bank. It involves a platform, often called a P2P NBFC, that facilitates the lending process and is regulated by a central authority, in this case, the RBI.

Why has India's P2P lending industry come to a halt?

The industry has come to a halt due to the RBI's recent circular that disallows certain practices which were previously considered under a 'creative interpretation' of the regulations. These practices included instant liquidity through a secondary market and the absorption of losses by P2P platforms.

What is the size of India's P2P lending industry?

The P2P lending industry in India has grown to approximately 10,000 crores in size over the past four years.

How many lenders or investors are there on P2P platforms in India?

There are about 10 to 15 lakh lenders or investors on P2P platforms in India.

What is the 'secondary market' mentioned in the script?

The secondary market in the context of P2P lending refers to a mechanism where P2P NBFCs would transfer loans from one lender to another to provide instant liquidity and an exit strategy for investors wanting to withdraw their money immediately.

Why was the secondary market practice not in line with RBI's intentions?

The RBI intended that investors take on the risk of the borrower not repaying the loan and receive their money back over the majority of the loan term. The practice of loan transfers contradicted this intention, as it allowed loans to be shuffled around rather than being managed through to completion.

What is the typical interest rate range for loans given out by P2P platforms?

P2P platforms typically give out loans at interest rates of 18 to 20%.

How much return do investors on P2P platforms generally receive?

Investors on P2P platforms generally receive returns in the range of 8 to 10%.

What is the role of the spread in P2P lending?

The spread, which is the difference between the interest rates charged to borrowers (18-20%) and the returns given to investors (8-10%), is approximately 10-12%. This spread is kept by the P2P platforms and also used to absorb defaults.

What are the consequences of the RBI's new circular for P2P platforms?

The consequences of the RBI's new circular are significant, as it requires P2P platforms to stop practices like instant liquidity and loss absorption. This may result in the platforms having to halt customer withdrawals, as they can no longer shuffle loans to facilitate exits.

What is the term 'closed group lending' mentioned in the script?

Closed group lending refers to a practice where P2P platforms facilitate loans between users of the same fintech service, such as Bat Pay or Cred, creating a closed loop of lending within a specific user group.

What impact has the RBI's delayed action had on investors?

The delayed action by the RBI has put investors in jeopardy, as they have been participating in an unregistered shadow banking system under the assumption that their investments were safe and compliant with regulations.