India's P2P lending is different from China.

I am the founder of Monexo (www.monexo.co) - RBI Registered P2P Lending Platform. I have seen P2P lending Marketplace model spread from UK to USA to the whole of Europe and Asia similar to e-commerce. However, in India P2P Lending is at a nascent stage - started in year 2017-18. I get this statement often "P2P lending has failed in China...... ".

I was based in Hong Kong, SAR during the period of turmoil in China P2P lending Industry and was close to quite a few P2P lending platform founders. I felt it is best to pen my own learnings from being in the geography and post facto research to bring out key points of differences between India and China P2P lending industry.

1. Regulatory Framework: China P2P lending industry started in 2006 and grew rapidly till 2015 without any regulatory framework. ?

While in India, the P2P lending guideline was published in year 2017 by RBI much before the industry had even actively begun.? These guidelines encompass obligatory registration, capital adequacy requirements and transparency norms, all of which decorate the credibility and trustworthiness of these platforms. One of the top reason India's rather more secure P2P lending environment is the presence of a regulatory framework.?

However, I must also say Regulations alone are NOT enough. Enforcement / Supervision is also necessary.?

1. Information Intermediaries vs Credit Intermediaries: Indian P2P lending structures allows P2P platform to be only “Information Intermediaries” and NOT “Credit Intermediaries”. This is clearly articulated in Section 6: Scope of Activities. In this paragraph, RBI guidelines clearly define boundaries of what is allowed and dis-allowed services by NBFC-P2P. NBFC’s and Banks are Credit Intermediaries. P2P lending Platforms cannot give “guaranteed” return or “take NPA’s / losses due to delinquency in their earnings. If this happens on P2P lending platforms, these P2P Lending Platforms have adopted themselves to becoming “Credit” Intermediary against a pure "Information" Intermediary. ?

In China, due to push for growth in years 2011-2015, most of the P2P lending companies became “Credit Intermediaries”. This was finally eliminated in April 2016 by China Banking Regulatory Commission which issued “Plan for Rectification of P2P Online Lending Risks”. As a result 65% of P2P platforms were assessed as “problematic” ??

3. Fund flow – Escrow Mechanism: China lacked Regulatory framework. This allowed the P2P lending platforms to hold the money in their own name / bank account. Few platforms embezzled the same.?

In line with UK P2P Lending guidelines from FCA, RBI, regulations made it mandatory for the P2P lending platform to create a 3rd party Escrow mechanism to hold funds of Investor and Borrower. P2P lending platform are NOT allowed to access the funds of the investors and keeping it away from the P2P lending platform / company?- thus disabling from use of funds for the company expense or any other purpose. ?

4. Transparency and Reporting: Transparency is a cornerstone of India's P2P lending industry. Platforms are required to disclose information about borrowers, including their credit score records?and interest charges. Thus, enabling each Investor in P2P lending to build his / her own portfolio. Also, all borrowers who have been furnished a loan from P2P Lending Platforms are required to be reported to all 4 CIC’s (CIBIL, CRIF Highmark, Equifax, Experian). ?

In China, during the years of 2011 to 2015, the P2P Lending Platforms had been behaving like “Credit” intermediaries thus this transparency was lacking. All Investors were mapped to all borrowers and the platform was taking “Credit” risk which they could not manage when the regulations came to force.?

5. Risk Mitigation Measures: India has a developed eco-system of (a) Borrower Identification using Aadhar & Pan and (b) Risk assessment based on CIC to say the least. India started it’s digital journey in 2008 with Public Digital Infrastructure being built under JAM (Jandhan, Aadhar & Mobile). Also, CIC’s were established under RBI guidelines and all Banks, NBFC’s were required to report all loans disbursed and payment status. This has become a good way to understand Borrower’s intent and capacity.?

In China, during 2007 the CIC’s were just being formed in the years of 2007. Thus, P2P Platforms mostly relied on paper trails for identification, capacity to repay and intent to pay. ?

Great example of success of P2P lending platform in UK is www.zopa.com - it has evolved in a Digital Bank after almost 2 decades as P2P lending platform. Another example of success is www.lendingclub.com from USA which originates USD 2 billion per quarter of Personal loans in developed banking market in just 2 decades and manages an asset book of USD 8 Bn.

P2P lending can be a driving force for India similar to Mutual Fund where investors are earning inflation beating returns as well as democratising finance. We have seen good signs of the same in India with P2P platforms successfully dealing with Global Pandemic – Covid.?

Monexo P2P lending landscape follows RBI guidelines and has positioned itself because of sturdy regulatory oversight, stringent threat mitigation measures and a dedication to transparency.?

#P2PLending #ChinaP2PLending ?#fintech Reserve Bank of India (RBI) Zopa Bank LendingClub