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.

Outlines

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🏦 P2P Lending Industry Crisis in India

India's peer-to-peer (P2P) lending industry, which allows individuals to lend money to others through a regulated platform, has faced a significant setback. The industry, estimated at around 10,000 crores and with 10 to 15 lakh investors, has grown rapidly over the past four years. However, this growth was fueled by 'creative interpretations' of RBI regulations, which the central bank has now deemed unacceptable. The first issue was the practice of instant liquidity, where P2P NBFCs would transfer loans to provide an exit for investors, contrary to RBI's intention of having investors bear the risk of non-repayment. The second issue was the absorption of losses through the interest rate spread, which was used to cover defaults and provide high returns to investors. These practices, including closed group lending facilitated by fintech platforms, have led to the creation of an unregistered shadow bank. The RBI has now issued a circular prohibiting these practices, which may force the P2P industry to halt customer withdrawals, putting investors at risk due to the regulatory oversight and industry's creative interpretations.

Keywords

💡P2P lending

P2P lending, which stands for peer-to-peer lending, is a method of debt financing that allows individuals to borrow and lend money without the involvement of traditional financial institutions. In the context of the video, P2P lending platforms facilitate lending between common people, acting as intermediaries regulated by the Reserve Bank of India (RBI). The video discusses the rapid growth and issues arising in India's P2P lending industry.

💡P2P NBFC

A P2P NBFC, or Non-Banking Financial Company, is a type of financial institution that operates P2P lending platforms. These entities are regulated by the RBI and play a crucial role in connecting lenders with borrowers in the P2P lending ecosystem. The video mentions that the P2P NBFCs have been involved in creative interpretations of RBI regulations, leading to the current crisis in the industry.

💡RBI

The RBI, or Reserve Bank of India, is the central banking institution of India, responsible for regulating the country's monetary policy and overseeing financial institutions. In the video, it is highlighted that the RBI has allowed the P2P lending industry to grow under its watch and has recently issued a circular to address the non-compliant practices within the industry.

💡Instant liquidity

Instant liquidity refers to the ability of investors to withdraw their funds immediately from an investment platform. In the script, it is mentioned that P2P NBFCs provided instant liquidity by transferring loans to other lenders, which was a creative but non-compliant interpretation of RBI regulations.

💡Secondary market

A secondary market is where financial instruments are traded after their initial issuance. In the context of P2P lending, the term is used to describe the practice of transferring loans from one lender to another, allowing for instant liquidity. The video explains that this practice was not intended by the RBI and has contributed to the current halt in the P2P lending industry.

💡Interest rates

Interest rates are the percentage at which loans are given out or investments are returned. The video mentions that P2P platforms typically offer loans at interest rates of 18 to 20%, while providing investors with returns of 8 to 10%. This spread is used by the platforms to absorb defaults and is a key aspect of the P2P lending model discussed in the video.

💡Defaults

Defaults refer to instances where borrowers fail to repay their loans as agreed. The script explains that the spread earned by P2P platforms is used to absorb defaults, which has historically kept the default rate low for investors. However, the recent RBI circular has highlighted the risk of defaults due to non-compliant practices.

💡Fintech

Fintech is a portmanteau of 'financial technology' and refers to companies that use technology to make financial services more accessible and efficient. In the video, fintech companies like Bajaj Finserv and Paytm are mentioned as having partnered with P2P platforms to offer investment opportunities, contributing to the growth of the P2P lending industry.

💡Closed group lending

Closed group lending is a practice where loans are facilitated between users of the same fintech platform. The video mentions that the RBI has banned this practice, as it was considered a part of the non-compliant interpretations of regulations by P2P platforms.

💡Mutual fund distributors

Mutual fund distributors are entities or individuals that sell mutual fund products to investors. The script indicates that mutual fund distributors were also involved in selling P2P lending as an investment idea to their clients, further expanding the reach of the P2P lending industry.

💡Shadow banking

Shadow banking refers to the credit intermediation involving entities and activities outside the regular banking system. The video describes how the growth of the P2P lending industry, with its unregistered practices, effectively created an unregistered shadow bank, posing risks to retail investors.

Highlights

India's P2P lending industry faces a halt due to regulatory changes.

P2P lending allows individuals to lend money to others through a regulated platform.

The industry has grown massively in the past four years to approximately 10,000 crores.

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

RBI's oversight allowed for a creative interpretation of regulations within the P2P industry.

Instant liquidity was provided by transferring loans to other lenders in a secondary market.

RBI did not intend for loans to be shuffled; they wanted investors to bear the risk of non-repayment.

P2P platforms absorbed losses using the spread between loan interest rates and investor returns.

Platforms offered returns of 8 to 10% to investors, while charging borrowers 18 to 20%.

Creative interpretations led to partnerships with large fintech companies like Paytm and Ked.

Paytm and Ked launched platforms offering returns up to 12% or 9% to investors.

Closed group lending, facilitated by P2P platforms within the same fintech ecosystem, was also banned by RBI.

Mutual fund distributors promoted P2P investments, attracting more retail investors.

The P2P industry effectively became an unregistered shadow bank under RBI's watch.

RBI has issued a circular prohibiting previous practices, impacting the industry's ability to provide withdrawals.

The industry must now stop withdrawals or find a way to comply with the new RBI regulations.

Investors are at risk due to RBI's delayed response and the industry's creative interpretations.

Transcripts

India's P2P lending industry has come to

a halt and it may have to stop customer

withdrawals in this week how did all of

this come to pass so first what is p2b

lending now traditionally Banks perform

the job of lending money giving out

loans and they also take deposits

peer-to-peer lending or P2P lending is

an idea where you I common people can

lend our money to other Ordinary People

and in between there is a plat form

called a P2P nbfc an entity that is

regulated by

RBI now this industry has grown

massively in the past four years and

today uh is approximately 10,000 crores

uh of size and they have about 10 to 15

lakh um lenders or investors on the

platforms and RBI has allowed this

industry to grow under its watch now

unfortunately for un and I this growth

was propelled by a certain creative

interpretation of RBI regulations so

what were these creative

interpretations the first creative

interpretation was that if you wanted to

withdraw your money immediately called

instant

liquidity then the P2P nbfc would simply

transfer your loans to somebody else and

thereby give you an exit they call this

a secondary Market this is not what the

RBI had intended they had intended that

investors take the risk of the borrower

not paying back and they get their money

on the majority of the loan not that

loans be shuffled around from one lender

to another the second creative

interpretation was about absorbing

losses now generally P2P platforms give

out loans at interest rates of 18 to 20%

and they give investors returns of 8 to

10% so this spread this spread of appro

approximately 10 12% is pocketed by the

P2P platforms and it's also used to

absorb all of the defaults this is why

in the past few years hardly any

investor in P2P platforms has seen any

default and this allowed P2P platforms

to tie up with India's largest fintex

namely bat pay and Ked to launch

platforms like the bat pay 12% club or

the Ked 9 % Club where investors were

given returns up to 12% or

9% by the way these tie-ups where uh the

P2P platform facilitates loans given by

users of fexs like bhat pay two other

users of the same fintech again like bat

pay or cred they're called closed group

lending this too RBI has banned so all

of these creative interpretations led to

a huge growth in the industry including

mutual fund Distributors were selling

these this idea of investment to their

clients and more and more retail

investors were joining these platforms

and creating in effect an unregistered

Shadow bank and all of this by the way

under rbi's watch so now the central

bank has woken up after four years of

Slumber and on Friday released a

circular saying that all of these

practices are no longer allowed and to

comply with this circular the industry

will have to stop withdrawals because

withdrawals rest on them being able to

shuffle around loans to people who don't

want to exit and give an exit to people

who do want to exit either they stop

withdrawals or they do not comply with

the RBI circular or RBI gives them a

relaxation whatever happens it is

India's investors whove been put into

Jeopardy because of rbi's Slumber and

because of creative interpretations by

by this industry