P2P lending under the lens, Raghuram Rajan’s recipe for redefining regulation, and more

Following its scrutiny of digital loans and prepaid wallets, the Reserve Bank of India (RBI) has now set its sights on peer-to-peer (P2P) lending platforms.

In its recent order, the RBI has sought information from a few platforms on their financial data, details on lender agreements, onboarding processes, loan structures, and app partnerships, reports Moneycontrol .

RBI Deputy Governor M. Rajeshwar Rao, remarked that the regulator had observed certain business practices that do not appear to be in line with its guidelines. The apex bank had last year ordered a few platforms to halt activities as well.

P2P lending is the practice of lending money to individuals or businesses through online services that match lenders with borrowers, cutting out the financial institution as the middleman.

“It provides easier access to credit for borrowers who might not qualify for traditional bank loans,” says Rajeev Barnwal, former Head of Product at RapiPay.

A recent study by LenDenClub found that 87% of borrowers on these platforms are millennials. Also, 67% of them have monthly incomes of less than ?30,000. The average loan amount stands at ?75,000.

“It offers competitive interest rates for borrowers and potentially higher returns for investors compared to traditional savings accounts,” Barnwal adds.

The promise of higher returns for investors, while underplaying risks could be a reason for the increased scrutiny, experts say . “They are allowing the lenders to prematurely withdraw their funds before the completion of loans, and disbursing loans to borrowers with the blanket consent of lenders. This is a violation of the licensing norms,” writes Tamal Bandyopadhyay on LinkedIn.

Following these developments, a 12-member association of P2P platforms has started to engage with the RBI to discuss the matter and to cut miscommunication.

Not just in India, but governments across the world are taking a closer look at P2P lending, says Fazlur Shah. “China's P2P lending market, for instance, faced a crackdown due to fraudulent platforms, highlighting the need for robust regulation. The UK's P2P lending sector faced liquidity issues during the pandemic, prompting calls for better liquidity management.”

The P2P lending market size is forecast to reach $10.5 billion by 2026, at a CAGR of 21.6 percent from 2021, says a report by consulting firm IndustryARC.

The industry is at a crossroads. But increased scrutiny is an opportunity for growth through responsible practices, Shah adds. “By prioritising transparency, compliance, risk management, and investor protection, P2P lending companies can thrive and continue revolutionising the lending landscape.”

How should fintechs in India be regulated?

The Indian fintech ecosystem has evolved as a formidable force and continues to grow as one of the largest markets globally. In fact, it is one of the most vibrant fintech hubs in the world, says a recent study by the World Economic Forum.

The government is now faced with the question of regulation — how to turn India into a fintech superpower while also ensuring consumer safety?

Raghuram Rajan , former Reserve Bank of India Governor and co-author of ‘Breaking the Mould: Reimagining India’s Economic Future’ says it’s all about finding the right balance between experimentation and protection.

Watch the video to know more and share your thoughts in the comments below.