Investors eye RBI move to regulate P2P lending

The online industry and e-commerce have acted as a game-changer, affecting the nature and dynamic of sectors including transportation, retail, hospitality, etc. It is now perhaps set to do the same to the financial sector. The Reserve Bank of India (RBI) in its Consultation Paper on Peer to Peer Lending released on 28 April (paper), while recognizing this potential, has proposed a framework with the goal of “developing an appropriate regulatory and supervisory toolkit that facilitates orderly growth of this sector so that its ability to provide an alternative avenue for credit for the right kind of borrowers is harnessed.” Facilitating (without participation) transactions between borrowers and lenders is the primary business of P2P platforms (platforms), though some offer credit assessment, payment monitoring services, etc.

RBI’s proposal: Many borrowers without access to traditional credit facilities due to the limited outreach and high transaction cost of credit institutions are forced to rely on the unorganized money-lending sector, which would change if this paper matures. The RBI proposes that platforms register as non-banking financial companies (NBFCs) and suggests a suitable leverage ratio to prevent platforms from expanding with indiscriminate leverage (which may fetter their business model, one that precludes taking liabilities onto their own balance sheets). While the requirements for a physical presence in India and fresh criteria for key managerial personnel of platforms seem positive, suggestions to limit a lender’s maximum contribution to borrowers/segments, minimum and maximum rates chargeable by lenders and KYC compliance (which will aid in preventing money-laundering) will help in stabilization.

Requiring a minimum of ₹20 million (US$295,000) capitalization and prohibiting guarantees on assured returns, etc., would alleviate the system in the long term, although in the short term, it may reduce the appeal of the sector for investors. Also, various state governments have enacted legislation to regulate the conduct of “money-lenders”, which would affect individual lenders registered on platforms. Since platforms will have users from different states, a balance on compliance with RBI regulations and different state laws is needed.

Luthra & Luthra Law Offices is a full-service law firm with offices in Delhi, Mumbai, Bangalore and Hyderabad. Dipti Lavya Swain is a partner and Advait Nair is an associate at the firm. The views of the authors are personal. This article is intended for general information purposes only and is not a substitute for legal advice.