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Regulations Shrink India’s Peer-To-Peer Lending Industry

When the Reserve Bank of India first brought out a discussion paper on peer-to-peer lending in April 2016, it said that there were 30 such start-ups in the country. It then proceeded to fashion a set of rules for the nascent but fast growing sector and came out with regulations in October 2017. Key among them was a requirement that peer-to-peer lenders register with the RBI.

Nine months since, only five of these lenders are registered in the ‘NBFC-P2P’ category, according to RBI data available until June 30, 2018.

This includes:

  • Fairassets Technologies India Pvt. Ltd.
  • Fincquare Fintech Pvt. Ltd.
  • Bridge Fintech Solutions Pvt. Ltd.
  • Bigwin Infotech Pvt. Ltd.
  • OHMY Technologies Pvt. Ltd.

A sixth, Lenden Club, told BloombergQuint that it received a licence to operate as a NBFC -P2P lender in July. The RBI does not provide data on the quantum of P2P lending. In response to a BloombergQuint RTI query, the RBI said the lending data for P2P lenders is not available with the regulator.

However, the number of P2P lenders registered is far lower than the number of entities that were estimated to be operating in the segment before the regulations were put in place. While the RBI has not released the number of applications, industry executives believe that close to 40 such entities had approached the regulator for a licence.

However, stringent conditions attached by the RBI may mean that a far fewer number will formally remain in the business.

One condition, which has weeded out smaller players, is the requirement to have net owned funds of atleast Rs 2 crore. This condition may have led to smaller platforms taking a hit, said Rajat Gandhi, co-founder of Faircent, one of the five who have completed registration formalities. Gandhi, however, added that he expects larger platforms to get into P2P lending now that it is a regulated space.

In March, Economic Times reported that Paytm is looking at entering P2P lending. In June, IIFL-backed 5paise.com disclosed that it too is interested in a NBFC-P2P licence.

Bhavin Patel, co-founder of Lenden Club says that a number of websites, which were conducting no serious business, have exited. This explains the gap between the number of P2P platforms that were in business before the regulations came into place and the number that have registered.

Life Under Regulation

For those P2P lenders who are now RBI-registered NBFCs, operations have had to adjust to the new regulations.

For instance, the new rules cap a lender’s exposure at Rs 10 lakh and aggregate loans to a borrower at the same amount. This cap is applicable to lending and borrowing across all P2P platforms and not just one. This is expected to become a hindrance in the development of the industry, said Gandhi.

Rajiv Ranjan, founder of NBFC-P2P lender Paisadukan, promoted by Bigwin Infotech, shares that view. The exposure norms deter institutional lending, he told BloombergQuint.

Considering that the industry is yet to establish it’s credibility, individual lending is going to be an issue and limits at an institutional level must go up.
Rajiv Ranjan, Founder and CMD, Paisadukan.

The cost of operations are high and margins are low. They can improve only if volume is allowed, Ranjan added.

There are other logistical problems that P2P lenders are facing.

The RBI has advised all P2P operators to appoint a trustee to monitor the flow of funds between escrow accounts of borrowers and lenders. The RBI guidelines specify that this trustee has to be a bank-promoted one. At present, IDBI trusteeship is the only one offering such services to P2P lenders, said Ranjan. “It is inconvinient. IDBI enjoys a monopoly and hence commands a high price,” he said.

The regulations were necessary, even if they come with costs attached, said Puneet Bhatia, head of the digital practice at Pedersen and Partners.

There is a trade off every time you introduce new-age models in a system.While lenders will face issues in the short term over higher cost of business and other such factors, over time it would benefit them by enabling them to build size and scale, both crucial to P2P players.
Puneet Bhatia, Head - Digital Practice, Pedersen and Partners.

The Upside Of Regulation

Some of the P2P lenders claim they are already seeing the benefits.

Faircent claims that it is now drawing 8000 new lenders each month compared to 1500 before the RBI regulations were introduced. The number of new borrowers approaching the company has also jumped, said Gandhi of Faircent.

Lenden Club claims to have seven- to-eight times more lenders post RBI regulations with ticket size rising from Rs 1.5 lakh to Rs 2.5 lakh rupees on average.

BloombergQuint could not verify this data since these companies are private.

Having registered as NBFCs, the P2P lender have access to data from credit bureaus, which helps expand the pool of potential borrowers which fall within the risk profile that lenders are looking for, said Ranjan. They can now access credit scores of borrowers on their own, instead of having to rely on tie ups with other NBFCs to do so, according to Ranjan.

“P2P was earlier just a form of money transfer from the lender to the borrower even as the common platform they used, made money,” said Bhatia. “These regulations have introduced structure and are a step towards levelling the field for all financial institutions,” he added.