Understanding NBFC-P2P Platforms

There has been lot of news articles across the board on highlighting wrong practices by some of the NBFC-P2P lending platforms.

Yes, these articles are right to a large extent and I feel lot more education is required for investors, distributors on this product.

NBFCs and Banks business model is to lend money while taking the following risks:

1. Tenure / Duration Risk
2. Interest Rate Risk
3. NPA / Loss Risk

However, NBFC-P2P lending companies have a "platform" license and NOT "loan company" license. They CANNOT take these risks.

My effort to educate the industry players, distributors, investors & regulators has been ongoing. You will find the following links interesting to watch:

https://www.youtube.com/watch?v=oNL87n-AmWQ

https://www.youtube.com/watch?v=9NnZAc9tPPE talk with FinTech ki Baat Shreyas Jani

https://www.youtube.com/watch?v=9aZIkg7OCuw&t=2s talk with The Alt Investor Yash Roongta, CFA, FRM

Let me speak on each of these risks:

1. Term / Duration Risk: This risks arise when a Bank or NBFC raise money / liability to lend for short term say 3,6,9,12 months and lend / assets which are not in the same duration. Also, the fact that loans / borrowers pay back every month as EMI's and these are lent to new borrowers immediately create a "Duration Risk." Banks and NBFCs can deal with these risk as they have to adhere to RBI guidelines for Asset-Liability Mismatch. You can read the same here: https://www.rbi.org.in/scripts/NotificationUser.aspx?Id=3804&Mode=0 However, NBFC-P2P lending platforms offering a term for liability i.e. offering products to investors for their money with a fixed duration (Fixed Maturity Peer to Peer /FMPP) are taking this risk.
2. Interest Risk: We all have witnessed in the last 18-24 months the Fixed Deposit Rates went up and NIM (Net Interest Margin) of Banks and NBFC were lower than the previous period. This happens as the Banks and NBFC cannot reprice the loans as they are on Fixed Rate while Deposits or other liability rates can change. This risk should NOT exist for NBFC-P2P lending platforms as they are matching multiple lenders to multiple borrowers. However, this risk exists and in play as lot of NBFC-P2p are unwinding "no lock in" and now offering a 11.5% p.a. return on 3.5 month FMPP. So now these platforms will see their income going down. This is a Risk which only Banks and NBFCs take NOT NBFC-P2P lending as per RBI guidelines.
3. NPA / Loss Risk: Banks and NBFCs are in the business of loan making and thus they have to take NPA on their P&L. NBFC-P2P lending companies are mere platform for lenders and borrowers - so NBFC-P2P cannot NPA's against their income. Also, "margin of safety" concept which lot of NBFC-P2P players are running is against NBFC-P2P guidelines para 6(1)(iv). This para 6(1)(iv) states - "not provide or arrange any credit enhancement or credit guarantee".

Reserve Bank of India (RBI) is aware of these points and should clearly take action to correct this situation in the nascent industry. I would like to point out here that China P2P lending industry collapsed when P2P lending companies took these risks and Chinese regulators found unacceptable.

As Monexo is a RBI licensed NBFC-P2P lending platform and we have made sure our policies, practices and technology adhere to the guidelines and the above 3 risks are NOT on the platform.

I will continue to write, speak and promote the industry in the right way forward.