Given past experience with emerging financial services businesses such as microfinance, the Reserve Bank of India (RBI) feels the need to have regulations in place for peer-to-peer (P2P) lending platforms, said R. Gandhi, deputy governor of the Reserve Bank of India (RBI).
“Given the microfinance episode and the public reaction to failures of unregulated entities, we feel P2P lending platforms need to be regulated, even though they have not yet really taken serious magnitude,” Gandhi said at Mint’s Marketplace Lending Summit on 17 May in Mumbai.
The central bank, however, believes that as of now, the nascent sector needs light-touch regulation.
“In the discussion paper, we have noted that internationally, there is every type of approach to dealing with the P2P platforms, ranging from outright ban to total indifference. Our tentative assessment is that P2P lending platforms need to be regulated, it now may be the right time and it can be light-touch,” he said.
RBI on 28 April put up a discussion paper on P2P lending, initiating steps to regulate the nascent business. RBI has proposed registering P2P lending platforms as non-banking financial companies (NBFCs).
Online P2P lending companies work as marketplaces that bring individual borrowers and lenders together for loan transactions without the intervention of traditional financial institutions such as banks.
RBI said it would be “prudent” to regulate the business because of “the impact it can have on traditional banking channels” and NBFCs and its “potential to disrupt the financial sector and throw up surprises”.
In 2015 alone, around 20 new online P2P lending companies were launched in India. At present, India has around 30 start-ups in the P2P lending business. “The balance of advantage would lie in developing an appropriate regulatory and supervisory toolkit that facilitates the orderly growth of this sector so that its ability to provide an alternative avenue for credit for the right kind of borrowers is harnessed,” the paper said.
Gandhi said there are two ways to regulate businesses—prudential regulations, which deal with solvency, safety, soundness of financial entities and financial systems; and conduct of business regulations, on how business entities deal with their customers, information disclosure, competence, continuity and fair business practices.
“It is clear that prudential regulation may have to be light for these platforms, as they will not be handling the moneys of the lenders. Actually, we need to be prohibiting them from dealing in such moneys,” said Gandhi.
Conduct of business regulation will be appropriate for P2P lending platforms, he said.
“As the lenders ‘trust’ the platforms for getting to know the borrowers, and avail additional services like KYC (know your customer) authentication, credit scoring, legal formalities, recovery assistance etc., code of conduct and fair practices norms will need to be applied,” he said.
Gandhi added that RBI believes that P2P lending is an important innovation in the financial services space as it furthers the agenda of financial inclusion.
“The Reserve Bank considers that the innovation of P2P lending through platforms facilitates direct interaction between small lenders and small borrowers, and hence furthers financial inclusion,” he said, adding that with appropriate regulatory arrangement, the central bank hopes that the platforms will be worthy of the trust that the lenders and the borrowers repose on them. The regulations proposed by RBI state that P2P companies must act only as intermediaries and their role must be limited to bringing the borrower and lender together.
P2P platforms can’t assure returns to lenders. The companies must have minimum capital of Rs.2 crore and the platforms may have to adhere to a leverage ratio so that they do not expand indiscriminately.
The platforms will have to guarantee confidentiality of customer data, the discussion paper said. Loan-recovery practices of the P2P platforms will need to adhere to existing guidelines on recovery practices.
Additionally, P2P platforms may be required to have a “brick-and-mortar” presence in India.