On steadier ground

With the Reserve Bank of India spelling out the guidelines for peer-to-peer (P2P) platforms, the fledgling lending space is all set to gather steam. Nearly a month after its decision to regulate P2P on par with non-banking finance companies, the RBI recently laid down directions that will usher in greater stability and credibility to the online platform and boost activity. P2P lending ideally refers to unsecured lending that happens on online platforms, outside of the parameters of banks or non-banking finance companies. While P2P lending has been gaining acceptance in India as an alternative source of credit, the industry is still nascent and tiny in the global context. By bringing such online platforms under its purview, the RBI has cleared the way for more investors — hitherto wary of an unregulated marketplace — to join the fray. Aside from lending a helping hand to the Centre’s financial inclusion drive by providing easy access to credit, the RBI’s directives will also ensure that only serious players able to comply with the norms stay in the game.

The RBI’s guidelines have addressed some of the key concerns of the industry. The clarification that an NBFC-P2P can act only as an intermediary, facilitating lending activity, and not take deposits or lend on its own, spares such platforms of the burden of provisioning or capital adequacy. It also helps avoid conflict of interest which could have risen if P2P platforms were allowed to use their own funds for on-lending. The guidelines also require P2Ps to become members of credit information companies and maintain and update credit information of the borrower. This should help mitigate risk of defaults, attract investments and drive innovations. Mandating P2Ps to report loans to credit bureaus can also aid borrowers, constrained by lack of credit history, to build one and widen their access to credit.

That said, some of the norms appear restrictive and could prove counterproductive for the growth of the industry. For instance, the blanket cap of ₹10 lakh on a lender’s exposure across all platforms can stifle flows. Given that the cap of ₹50,000 on exposure of a single lender to the same borrower serves the purpose of mitigating the risk of default, the regulator can remove or increase the cap on a lender’s aggregate exposure. Many P2P platforms have been employing agents to offer recovery services. While the RBI has cautioned P2P platforms against the use of coercion, there is still lack of clarity among players on their legal rights when proceeding against borrowers. Tying up such loose ends is imperative to realise the full potential of P2P as an alternative form of finance. After all, the benefit of lower operational cost can percolate down to the borrower, only if there is greater vibrancy and competition within the space.

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