Saket Seth

Chennai, 23 September

The Reserve Bank of India (RBI) has introduced stricter guidelines for P2P lending platforms to prevent these platforms from operating like financial institutions.

What are Peer-to-Peer (P2P) lending platforms?

Peer-to-peer (P2P) lending platforms are Non-Banking Financial Companies (NBFCs) that connect individual borrowers to individual lenders. Lenders sign up on these platforms to earn interest, while borrowers register and submit loan requests. P2P platforms handle transactions, credit checks, loan disbursement, and repayment.

Why has RBI come up with updated guidelines?

P2P lending has seen massive growth in recent years, however, it subverted norms in the following ways. 

P2P platforms allowed instant withdrawals to lenders by using other lenders’ money, termed instant liquidity. These secondary market transactions fall beyond the mandate of P2P lenders. 

P2P platforms kept a portion of the loan interest, known as spreads. For example, if a borrower pays 20% interest, the platform retains part of it while the rest goes to the lender. These spreads served as a security against defaults, effectively making the platform a financier. 

The RBI has prohibited P2P NBFCs from taking on any credit risks, meaning that a loan default will be borne by the lenders. The platforms declare this to the lenders. 

“No institution should be considered as a financial institution so far as it is not creating a loan book on its own balance sheet”, said Rishabh Mastaram, Founder, RGM Legal.  

What are the new guidelines? 

The RBI has prohibited P2P NBFCs from taking on any credit risks, meaning that a loan default will be borne by the lenders. The platforms declare this to the lenders. 

The platforms should also not cross-sell any insurance product with credit guarantee and credit enhancement. “These changes are consistent with the Default Loss Guarantee (DLG) directives. RBI is ensuring platforms should not take direct credit risk or underwrite any risk whatsoever for the loan facilitated on its platform,” said Mastaram.  

RBI issued the DLG Guidelines in June 2023 to clarify and permit loss-sharing agreements in digital lending, known as default loss guarantees.

The RBI has banned secondary market transactions, stating that funds in ‘lenders’ escrow accounts cannot be used for loan repayments, and those in ‘borrowers’ escrow accounts cannot be used for loan disbursements. Funds must remain in these accounts for no more than ‘T+1’ day from receipt. ‘T’ is the date on which funds are received into the escrow accounts.

Platforms cannot guarantee loan recovery, promote P2P lending as an investment, form strategic partnerships with fintech, and assume credit risk through DLG.

What could be the potential impact of new guidelines on the platforms? 

Experts are concerned about reduced cash flow in the P2P lending model due to a ban on instant liquidity. The T+1 guidelines will also not give time to process money. 

The ban on strategic partnerships will lead to a lack of financial safety for lenders. “P2P lending platforms cannot survive without strategic partnerships”, said Mastaram. “New entrants will find it difficult to compete with established platforms since such partnerships and DLG are banned now”.