RBI’s P2P Party Pooper: How New Rules Are Shaking Up P2P Lending
Peer to Peer (P2P) lending: a space with 1-1.5 million lenders who have lent an estimated ₹10,000 crores. But the RBI was just not happy, so they decided to lay down some ground rules and levy some penalties. And now P2P platforms are worried. What…
Peer to Peer (P2P) lending: a space with 1-1.5 million lenders who have lent an estimated ₹10,000 crores. But the RBI was just not happy, so they decided to lay down some ground rules and levy some penalties. And now P2P platforms are worried.
What is P2P lending? A loan? An Investment?
P2P apps allow individuals to lend money to each other and the platforms operate as intermediaries in the process. They match the lenders with borrowers and manage the transactions. A person taking a loan from this app will be charged an interest rate of 18-24%, of which a portion is taken by the company, while the lender earns 12%. This 12% interest rate is higher than what one would get on a fixed deposit and seemingly has less risk than investing in equities. However, if the borrower has defaulted then there's no way for you to get your money back, the risk is completely on you. They also had the option to lend to multiple people, instead of just one, to diversify and reduce risk. For example, you are lending ₹1,000 on the platform to 10 people, totalling to a ₹10,000 investment. Even if 1 person defaults, 9 others will pay you back.
Loans from banks are generally less risky because they are secured by collateral, unlike P2P lending. P2P lending offers both secured and unsecured loans, but the majority of these loans are unsecured which is why borrowers choose P2P despite the high interest rates. Most of these deals are based on trust, which is a risky game when it comes to money.
This sounds simple enough and that's what the concept was based on. The problem is, when P2P platforms were marketed like this, the companies didn't experience much growth. India's fintech sector grew and unicorns were born but P2P platforms were feeling left out, watching from the bench.
During the pandemic, they realized the need to switch the narrative about these apps from a lending platform to an investment avenue. Companies like Faircent, Lendbox, Liquiloans, started working with fintechs like BharatPe and Cred. BharatPe's 12% club talks about "what makes it a great investment" and how users will receive returns "up fto 10-11% returns." Even app stores started listing them under the investment category, rather than the loan category.
If you were to lend money to someone you'd think the jargon would include Cibil scores, principal, interest, etc. Instead, the jargon one would see on P2P platforms would include terms like risk, liquidity, guaranteed return, etc. In fact, the lender was being referred to as the "investor." You can see where the confusion started.
The returns were high and the platforms were charging a lower commission relative to other investment products. But the "investors" on the platform don't entirely know the risk involved. They're not sure who they're lending to, or what the default rate is. A user on r/personalfinanceindia was curious about how p2p lending works. Upon learning how p2p lending works, this was the user's response:
Point being, there are many others like this user who have "invested" their money without fully understanding how it works.
Are you starting to see why RBI decided to step in?
In February, RBI reportedly sent out a mail to multiple players in the p2p lending space including BharatPe, Cred, Jupiter, Lendingkart, LiquiLoans, asking them to detail out their onboarding process, customer profiles, agreements with lenders etc. Clearly, they weren't happy with their responses.
As they grew and got new users, p2p platforms wanted to auto-redeploy repayments to new borrowers, but RBI had to remind them that they're not a bank. In the new regulations, they have stated that every transaction must be settled by the next day, making it costly and complex.
Notice the words used on Bharat Pe 12% Club's Website
Another thing that made p2p attractive was instant liquidity. The platforms used an algorithm to "sell" your loan to another user if you wanted to cash out, giving you instant liquidity. This is a big no from RBI and they have now banned this. Essentially, they can't reshuffle loans between lenders anymore. If you want to withdraw your money, you have no option but to wait for it to mature.
Here are some other highlights from the regulations:
The platform must not provide any assurance or guarantee for the recovery of loans.
They cannot promote p2p lending as an investment product with features like tenure-linked assured minimum returns, liquidity options, etc
The total exposure of a lender to all borrowers, across p2p platforms, shall be capped at ₹50,00,000.
The individual lenders have to approve the individual recipients of the loan and both participants have to sign the loan contract.
The platform must record details about the borrowers including personal identity (with consent), interest rate sought and credit score.
On its website, it must publicly display its portfolio performance, including share of non-performing assets (NPAs) on a monthly basis. They must also disclose all losses borne by the lenders on principal or interest or both.
During the process, RBI found that LiquiLoans and LenDen Club had not disclosed personal details including credit assessment and risk profile of borrowers to prospective lenders. They had also disbursed loans without the specific approval of individual lenders. Consequently, they levied a fine of ₹1.92 crore on LiquiLoans and ₹1.99 crore on LenDen Club.
The new rules don't make it very appealing for lenders to join the platform. No more reshuffling loans between lenders anymore, waiting till your loan matures to withdraw your money and no guarantees for recovery of loans sounds pretty unattractive. RBI was not nice about it either, as the platforms weren't given any grace period to implement these rules; they were effective immediately.
These new rules might just be the end of P2P lending in India. In any case, brace yourselves for some turbulence in the p2p lending space.
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