P2P Industry: When Will Reserve Bank of India Walk The Talk?
Illustration courtesy: ET Money

P2P Industry: When Will Reserve Bank of India Walk The Talk?

The following incident succinctly sums up what’s happening on India’s peer-to-peer (P2P) lending landscape.

In May, Mr A invested Rs 10,000 to be lent to borrowers on a P2P platform, which we'll call Platform B. I'm not naming either the investor/lender or the P2P platform involved.

Mr A transferred the money on May 3, and the credit reflected on the P2P platform on May 9.

He had chosen the “manual” option to invest. There is also an “auto” investment option. In the manual investment process, the investor picks the borrowers, and the platform follows the investor’s instructions. In auto investing, the platform checks the credit score and cash flow (whether the borrower is a salaried person or not) of prospective borrowers, among other credit appraisal parameters.

On May 16, Mr A checked the website of the platform with the intention of choosing borrowers. However, he found that no money was available for investment as the Rs 10,000 had already been invested in 165 loans, with an average loan size of Rs 60.60.

This was okay since this is the norm to diversify risk. What was not fine with Mr A was that 19 borrowers, or 11.5 per cent of them, had not paid the instalment for loans already taken from him for at least 30 days. This is the first stage of default. If a borrower does not service a loan for 90 days, the loan becomes a non-performing asset (NPA).

The question is: If someone invests on May 9, how can the money be lent to borrowers in April or earlier, some of whom have already started defaulting on loan repayments?

By mid-June, the number of Mr A's borrowers dropped to 136, but the number of loans not serviced for 30 days rose to 34. On top of that, there were seven NPAs. By mid-July, the number of borrowers further dropped to 85. This time, 24 loans, or more than one-fourth of the loans disbursed, experienced non-payment for 30 days, and six loans were NPAs.

Of course, Mr A has been earning interest every month (the annual interest promised to him is 8.5 per cent). But the question remains: even before his money hit the P2P platform, how could the borrowers get loans? As a lender, how could Mr A have NPAs on his books now when he started lending in June? The answer is that existing bad loans have been distributed among new lenders.

I am also curious: Why did Mr A enter the P2P market to earn 8.5 per cent interest when some banks are offering similar or even higher interest on fixed deposits? It seems the hook for the P2P platform is instant liquidity. Officially, such platforms have stopped offering instant liquidity after the Reserve Bank of India's (RBI's) intervention, but even now, big investors can call and get their money back before maturity. Earning 8.5 per cent is not bad, as liquid mutual funds are offering around 6.5 per cent.

It’s clear that some P2P platforms are behaving like deposit-taking non-banking financial companies (NBFCs). They are also running collective investment schemes where a pool of money is created with subscriptions from different lenders, and loans are given to a string of borrowers. This is ailment No 1.

Let’s look at ailment No. 2. Some P2P platforms are offering the so-called margin of safety. What’s that? When an investor earns around 8.5 per cent, the borrower could be paying 22 per cent interest for loans. The difference between the two – 13.5 per cent – is the margin of safety. This means unless bad loans swell beyond 13.5 per cent of the total loans, an investor will not lose money.

It’s another matter that since the loans are granular and hundreds of borrowers have exposure to a single investor, the chances of bad loans completely eroding the returns are far less. The 13.5 per cent spread here is something like the net interest margin (NIM) – loosely the difference between the cost of deposits and earnings on loans – for the banking industry. But P2P lenders are not banks. Does the RBI norm permit this practice of keeping the spread in an escrow account to mitigate credit risks? Isn’t the risk to be borne by the lenders? Aren’t the platforms just matchmakers (for a fee)? The margin of safety is nothing but a credit guarantee or credit enhancement mechanism.

Here is the scope of activities for an NBFC-P2P entity as defined by the regulator (I have chosen only those relevant in the context):

# Act as an intermediary providing an online marketplace or platform to the participants involved in peer-to-peer lending

# Not raise deposits as defined by or under Section 45I(bb) of the RBI Act or the Companies Act, 2013;

# Not lend on its own;

# Not provide or arrange any credit enhancement or credit guarantee;

# Not facilitate or permit any secured lending linked to its platform – only clean loans will be permitted;

# Not hold, on its own balance sheet, funds received from lenders for lending, or funds received from borrowers for servicing loans…:

Ailment No 3 is the asset-liability mismatches that some P2P lenders are taking on their own books. While investments are allowed for three months, the loans are typically given for a year. How is this done while the replacement of lenders is not permitted? For some P2P platforms, the business is a passing the parcel game.

Of course, the industry has its own points of view. For instance, in the absence of a secondary market, retail investors/lenders need an exit route. This justifies replacement of one lender with another.

The platforms also don’t see anything wrong with forming partnerships with fintechs. P2P platforms need to invest heavily in technology infrastructure. How will they compete with unregulated digital lenders? To reduce their customer acquisition costs, P2P platforms have started to align deeply with various large, well-funded fintechs, owning and servicing the customers jointly. This gives the impression that they are renting out licences.

They claim to have discovered a viable and sustainable business model, accepted by both lenders and borrowers. This has helped the industry scale up in the past few years, post-Covid, adding close to Rs 10,000 crore to its loan book. They have created an alternative supply of credit for unserved borrowers, including micro, small, and medium enterprises, without depending on any largesse from the government.

Indeed, they can defend what they are doing, but the problem is that there are others who have been following the rule book. Shouldn’t there be a level playing field for all? The RBI needs to step in here.

In a February speech at an NBFC Summit organised by the Confederation of Indian Industry in Mumbai, RBI Deputy Governor Rajeshwar Rao said:

“Of late, some of the business practices of NBFC-P2Ps do not appear to be in line with the regulatory guidelines. … NBFC-P2Ps have been observed to underplay the risks through various means such as promising high/assured returns, structuring the transactions, providing anytime fund recall facilities, etc. Let me make it absolutely clear that any breach of licensing conditions and regulatory guidelines is non-acceptable.”

For the RBI, it’s time to walk the talk.

The regulator has recently issued show cause notices to a few P2P platforms for certain practices. Let’s see how they defend themselves and how the regulator reacts.

Incidentally, in the past two years, since August 22, 2022, this is the fourth time this column is dealing with what’s happening in the P2P space.

This column first appeared in Business Standard.

The writer is a Consulting Editor of Business Standard and Senior Adviser of Jana Small Finance Bank

Writes Banker's Trust every Monday in Business Standard.

Latest book?Roller Coaster: An Affair with Banking?

Twitter: TamalBandyo

Website:?https://bankerstrust.in ?


?

Kafil Saleem

Building Zapro | eProcurement | Ex-KPMG | SAP | Kissflow

3 个月

Thanks for the Insight! Tamal Bandyopadhyay It's intriguing to see how P2P platforms handle scrutiny, especially after previous RBI regulations. Eager to see the outcomes! For insights, check Zapro https://zapro.ai/

回复
Yash Roongta, CFA, FRM

Founder @ALT Investor | Join My Community | Views are personal & not recommendations

3 个月

Very well laid out Tamal Bandyopadhyay! RBI needs to step in before the damage is irreparable!

Abhinav Rege

Branding & Marketing Strategist at Social Donut & Admattic

3 个月
回复
DINKAR CHOPRA

Director|Investor|Mentor|Author.

3 个月

Insightful

回复
Kc Chohan

Specialist in Cutting Taxes by 30-46% per year for Those Paying $500K+ Annually

3 个月

Hmm, interesting development. Curious about safeguards for lenders? Do you see potential industry-wide implications? Tamal Bandyopadhyay

回复

要查看或添加评论,请登录

Tamal Bandyopadhyay的更多文章

  • CUSTOMER Takes Centre Stage In This Round Of The Battle

    CUSTOMER Takes Centre Stage In This Round Of The Battle

    As the July-September quarter of 2024-2025 (FY25) comes to an end amid intense debate over whether the best is behind…

    13 条评论
  • Perils Of The PUSH LOAN Phenomenon

    Perils Of The PUSH LOAN Phenomenon

    India’s fast-moving consumer goods sector grew 5.7 per cent by value and 4.

    11 条评论
  • CREDIT CULTURE: What's That?

    CREDIT CULTURE: What's That?

    A few months ago, in the run-up to the general elections, a large bank could not continue with the recovery process of…

    5 条评论
  • When Deposits Become 'ASSETS' For Banks

    When Deposits Become 'ASSETS' For Banks

    My neighbour Mr Fernandez has resumed his habit of visiting bank branches. A super senior citizen, he earlier used to…

    20 条评论
  • Reserve Bank of India Walks The Talk

    Reserve Bank of India Walks The Talk

    The idiom, “All bark and no bite”, doesn’t seem to have a place in the Indian banking regulator’s lexicon. Just about a…

    11 条评论
  • PSU Defaults And Moral Hazards

    PSU Defaults And Moral Hazards

    One could hear a collective sigh of relief from the Indian banking sector when the bankers learnt that the government…

    4 条评论
  • RBI Opens Door For Rate Cut, Finally

    RBI Opens Door For Rate Cut, Finally

    Once again, the Indian central bank has maintained status quo at the October meeting of its rate-setting body when it…

    3 条评论
  • October Monetary Policy: Status Quo On Rate; Stance Too May Not Change

    October Monetary Policy: Status Quo On Rate; Stance Too May Not Change

    In its August meeting, the Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) decided to maintain the…

    1 条评论
  • A New Chapter In Microfinance Where Lenders Are Chasing The Borrowers

    A New Chapter In Microfinance Where Lenders Are Chasing The Borrowers

    Fusion Finance Ltd, a listed microfinance company, has recently said that it might need to make an additional provision…

    21 条评论
  • Every Thing You Want To Know About SROs In Financinal Sector

    Every Thing You Want To Know About SROs In Financinal Sector

    In August, the Reserve Bank of India (RBI) recognised the Fintech Association for Consumer Empowerment (FACE) as a…

    5 条评论

社区洞察

其他会员也浏览了