P2P Lending: Barking Up The Wrong Tree

P2P platforms do not have the safety net.
Instead of playing the role of an intermediary, if they run their own balance sheets for safety and growth, it’s a recipe for disaster, warns Tamal Bandyopadhyay.

Illustration: Dominic Xavier/Rediff.com

In July last year, I wrote in this column: ‘Before it is too late, the RBI should come down on the practice of renting out the P2P (peer-to-peer) licence, playing the role of deposit-taking NBFCs (non-banking financial companies), offering daily interest without repayment from the borrowers and creating asset-liability mismatches for some of them.’

The RBI, after conducting a ‘scrutiny’ of ‘select NBFC-P2P companies’ between June and September 2023, found ‘multiple violations’ of norms laid down by the regulator in October 2017 when the licensing norms to usher in this set of companies on the Indian financial turf were issued.

Ahead of that, in March 2016, the RBI had issued the first draft on P2P lending for consultation with the stakeholders.

Going by the licensing norms, apart from being ‘fit and proper’ to run the P2P platforms, one must have at least Rs 2 crore net-owned funds.

The RBI has issued around 25 licences so far, but not all of them have gone live.

Around 15 entities went live, but one-third of them have shut up shop. Analysts peg the outstanding loan book for the industry at around Rs 6,000 crore (Rs 60 billion) and say four of them have more than 90 per cent of the market share.

Initially, one could lend Rs 10 lakh (Rs 1 million). In December 2019, the amount was raised to Rs 50 lakh (Rs 5 million).

A lender can give this money to multiple borrowers across P2P platforms.

A borrower, however, cannot get more than Rs 10 lakh, irrespective of the number of lenders.

Finally, a lender’s exposure to a single borrower is capped at Rs 50,000. (This means, if a borrower wants Rs 10 lakh, there have to be at least 20 lenders.)

P2P is an online marketplace or a lending platform, which collects money in escrow accounts from individuals and lends to individuals as well as micro and small enterprises without any collateral.

(An escrow account is a temporary pass-through account held by a third party during the process of a transaction between two parties. This account operates until the completion of a transaction process, which is implemented after all the conditions between the buyer and the seller are settled.)

The P2P firms can’t lend on their own balance sheets — they can only facilitate borrowing and lending.

They earn fees from both lenders and borrowers by connecting them, ensuring collection of loan repayment, and offering allied support services.

The NBFC-P2P platforms cannot collect deposits directly or indirectly to facilitate lending.

Let’s go back to the current situation. First, the RBI collected data from all P2P lending platforms and questioned their practices.

It followed that up with on-site supervision of the bigger ones. The findings were a ’cause of serious supervisory discomfort’ for the RBI.

The RBI’s department of supervision wrote to most of the companies in September-October asking them to comply with the supervisory observations within a fortnight.

Finally, in December, the RBI sent another letter to most NBFC-P2P companies, directing them to amend three prevalent practices of the industry within a fortnight.

The P2P companies also needed to place the RBI’s letter before their respective boards.

Why is the RBI annoyed with P2P platforms? What are the regulator’s concerns?

# P2P platforms are allowing the lenders to prematurely withdraw their funds before the completion of loans.

This means one lender is replaced by another for the residual period of the loan without explicit instruction from the lenders on the platform.

Replacement of loans stems from the “deposit-taking” nature of these NBFC-P2Ps.

#The RBI norms dictate that lenders as well borrowers on the platform must sign the loan contracts.

Instead of doing that, the platforms are disbursing loans to borrowers with the blanket consent of lenders. This is a violation of the licensing norms.

# There are also concerns over the norms that govern the flow of funds.

These platforms are transferring the repayments received in the borrowers’ escrow account to the lenders’ escrow account to be able to reinvest the money.

The money needs to flow from the borrower’s repayment escrow account to the respective lender’s bank account.

The RBI has warned the P2P platforms to stop such practices with immediate effect. If they don’t, they will face regulatory/supervisory actions.

While credit goes to the RBI for being aware that most P2P platforms are not complying with norms, the key issues don’t seem to have been addressed yet.

Many of the P2P platforms are offering almost fixed (with an ‘up to XXX per cent’ caveat) return to the lenders for a specific period of time — six months, one year and more.

This is what public deposit-taking NBFCs do. Even they cannot take term deposits of less than one year. And, they need to have a minimum of Rs 50 crore (Rs 500 million) capital to start the business (versus Rs 2 crore [Rs 20 million] for a P2P-NBFC) and 15 per cent capital adequacy ratio.

This is a major violation of the rules that govern the industry.

The P2P platform’s job is to connect a lender with a borrower, and the interest rate and tenure of the loan can/will vary from case to case.

In blatant violation of this, they are creating a pool of money and disbursing loans from there and offering a near-fixed interest rate to the lenders.

What’s more, they have created the so-called ‘margin of safety’ in their business model.

They are supposed to earn only the fee income, but, in reality, many of them are not passing the full interest income after adjusting the fee income to the lenders.

While a lender gets, say, 9 per cent for one-year investment, the P2P platforms are giving loans, say, at 24 per cent — keeping 15 per cent (24 per cent minus 9 per cent) as a margin of safety to take care of bad loans, if any.

Even if some loan assets turn bad, some of the P2P platforms don’t care since the credit cost is already factored in.

What’s more, such platforms keep the bad assets on their own books! Again, like an NBFC.

Has the RBI looked into these issues? The crux of the violation is, many of the P2P platforms are acting like public deposit-taking NBFCs.

One cannot argue with the direction that the P2P platforms must instantly transfer the loan repayments by the borrowers to the lenders’ bank account.

The RBI can, however, reconsider this since it will make life difficult for some of the smaller P2P platforms that have not turned into deposit-taking NBFCs but churn the money for scaling up business.

Many in the community of investors might not mind getting the principal sum lent and interest on it at one go once the tenure of the loan is over, instead of a monthly cash flow.

A swift, clear, and precise action from the regulation and supervision arms of the RBI to stop the ‘public deposit-taking’ nature of the P2P platform is the way forward for consumer protection.

For depositors in banks and non-banks, there is a safety net in terms of statutory liquidity ratio/liquidity coverage ratio; for loan assets, the capital requirement takes care of losses to a certain extent.

P2P platforms do not have the safety net. Instead of playing the role of an intermediary, if they run their own balance sheets for safety and growth, it’s a recipe for disaster.

Disclaimer: These are Tamal Bandyopadhyay’s personal views.

Feature Presentation: Rajesh Alva/Rediff.com

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