Some business practices of NBFC-P2P (peer-to-peer) lenders appear to not be in line with regulatory guidelines, and such lenders have been underplaying certain business risks, Reserve Bank of India Deputy Governor M Rajeshwar Rao said. He also dismissed constant requests from NBFCs to convert into banks, saying that NBFCs have evolved as niche companies serving specific economic functions, and it is uncharacteristic for them to demand becoming like banks.

“A large proportion of lenders on NBFC-P2Ps are individuals, and they are not expected to be well-equipped to understand the risks involved in providing credit. Instead of educating the lenders about the inherent risks in the lending activity, NBFC-P2Ps have been observed to underplay the risks through various means such as promising high or assured returns, structuring the transactions, providing anytime fund recall facilities, etc.,” Rao said at the NBFC Summit organised by the Confederation of Indian Industry (CII).

Since NBFC-P2Ps do not undertake any credit risk on themselves and operate as a “meeting place for lenders and borrowers,” prudential regulations for NBFC-P2Ps have been kept very light at basic entry-level requirements, even as business conduct norms are on par with those of other regulated entities. However, some of these entities are now misusing these relaxations.

Commenting on industry demand to allow more NBFCs to accept public deposits, Rao said it is “indeed the non-acceptance of public deposits” by NBFCs, which gives RBI the comfort to have lower entry barriers for NBFCs, allow them to specialise in a sector, and have lower exit barriers to wind up their business.

NBFC-MFIs prioritising margins

Rao also highlighted some concerns regarding NBFC-MFI (microfinance institutions) misusing their relaxations to support margins. This has largely been the case following the transition to the principle-based framework for the MFI sector from the earlier rule-based prescriptions on the pricing of loans.

“It has been observed that while the lenders were quick to pass on the increased costs to borrowers, they have been reluctant to pass on the benefits envisaged under the new framework. Some of the MFIs have increased their margins disproportionately in the new regime. We are not oblivious to the misuse of the freedom provided to the microfinance sector, and irresponsible practices would compel us to act,” he said.

Rao said that while the regulatory framework for NBFCs has provided them operational flexibility, there are “certain risks on the horizon,” and NBFCs must monitor these risks in their business models or balance sheets and initiate necessary action as required.

In pursuance of high growth, NBFCs tend to onboard customers with oversimplified underwriting processes. While ease and convenience are important for borrowers, this should not come at the cost of underwriting standards, and NBFCs should focus on maintaining the quality of their loan portfolio, he added.