Regulations in P2P Industry: Posing Limitations or Driving a Safe Play
Ease of regulation will not only help in bringing more players to the sector but will also help to bring large and last mile unbanked person to the financial system and will also support Digital India to a great extent
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Lending has been one of the oldest professions in the world. With a rise in demand of quick borrowing and possibilities of better returns, P2P technology has emerged as the world's fastest growing lending platform and can be termed as one of the most unconventional financial products of recent times.
Peer to Peer lending is not a new idea, but its formalization has helped thousands of people already. The origin of Digital P2P lending in India can actually be traced back to 2012 when some of the entrepreneurs established a digital lending platform.
It began as an unorganized sector in India. Hence, to prevent user's interest, to stop unauthorised money into the system and to curb rampant fraud, RBI issued a guideline to companies operating in a peer to peer lending and classified them as NBFC-P2P in October 2017. This became the twelfth category of NBFC introduced by RBI. The guideline states that no NBFC can start or carry on the business of a P2P lending platform without obtaining a Certificate of Registration.
RBI guidelines define "peer to peer lending platform' as the business of providing under a contract, the service of loan facilitation, via an online medium or otherwise, to the participants who have entered into an arrangement with that platform to lend on it or to avail loan facilitation services provided by it. The prudential guidelines include Every company seeking registration with the bank as an NBFC-P2P shall have a net owned funds of not less than INR 20 million, cannot raise the deposit under Section 45I(bb) of the Act or the Companies Act, 2013 and cannot lend on its own.
(1) The aggregate exposure of a lender to all borrowers at any point of time, across all P2Ps, shall be subject to a cap of INR 10 lakh.
(2) The aggregate loans taken by a borrower at any point of time, across all P2Ps, shall be subject to a cap of INR 10 lakh
(3) The exposure of a single lender to the same borrower, across all P2Ps, shall not exceed INR 50,000.
(4) The maturity of the loans shall not exceed 36 months
Apart from these norms, RBI has also prescribed fund transfer between participants to be done through escrow arrangements operated by the trustee appointed by the bank maintaining escrow accounts. It's prudent that the guidelines highlighted an emphasis on the transparency and disclosure requirements to the lenders, borrowers in the public domain. It contains an overview of credit assessment/score methodology and factors considered, protection of data, grievance redressal mechanism, portfolio performance on NPAs on monthly assets and segregation by age.
The actions were to ensure a robust and sustainable sector of online lending. However, soon after a year of business & following these guidelines, industry players realised that the cap on exposure is limiting the sector's growth. It might be due to the recent crackdown in Beijing and the regulators are more selective & conservative with their procedures, tightening the environment will not only limits the number of players in the industry but will also slow down the market growth. The pressure will build on existing players because Indian P2P industry is still at a nascent stage which requires high volume.
At this stage, a higher value is not a major concern but volume is the need of the hour. If we see the current scenario, there are only 13 certified players. Such a small list cannot create the volume to make this industry credible. Greater volumes will eventually distribute the chances of default and growth trend will be inclined towards the positive side.
If we look at other successful markets like US & Europe where P2P sector got some ease of doing business and has created tremendous wealth for the country. Zopa is a good example of this, it started as P2P platform and today they have a banking license. Thus, China's tragedy cannot be considered as a benchmark. Regulators might be playing safe imposing limitations but NBFC-P2P Lending business is not viable with such limits. Regulators should focus on scrutiny, they should allow higher cap and keep a regular check on the company's NPA level at frequent intervals, say quarterly instead of yearly.
Since lending & borrowing exposure is capped and playing safe is shrinking the participation. The number of Peer to Peer lenders registered is far lower than the entities that were estimated to be operating in the segment before the regulations were in place. Stringent conditions attached by the regulators may mean that a far fewer number will formally remain in the business because of the requirement to have net owned funds of at least Rs 2 crore. This condition may have led to smaller platforms taken a hit.
Lack of Interest From VCs
VCs also, are hardly showing interest in the business because companies cannot raise the deposit and cannot lend its own are narrowing the sector's growth. The cost of operations is high and margins are low which can improve only if the volume is allowed and keeping away venture capitalists.
Higher exposure can ensure sector viability as well as will contribute to financial inclusion through bringing last mile people to the banking system. The sector also promotes Digital India. Initially, the sector was expected to be a $4-$5 billion industry by 2023 but without regulators support, it's not possible.
Ease of regulation will not only help in bringing more players to the sector but will also help to bring large and last mile unbanked person to the financial system and will also support Digital India to a great extent. Considering that the industry is yet to establish its credibility, individual lending is going to be an issue and limits at an institutional level must go up.