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- Is P2P Lending Dead? 💀
Welcome to this week’s Altsights!
For those who don’t know - I previously led 1invest, a P2P lending platform, before starting Altcase in early 2024.
The RBI’s recent regulations and interventions in the P2P industry caught my eye and I thought I’ll unpack all that’s transpired.
Here's what I'll be unpacking today:
What is P2P Lending/Borrowing? 🤔
When we need money, we go to a bank and seek a loan 🏦
However, the bank gives us a loan only if we have a satisfactory credit score. If not, well - hard luck!
Does that mean loan is a distant dream for low credit score folks?
Well, they can ask their relatives or friends to lend them the money.
This is called a P2P (peer-to-peer) transaction where the lending and borrowing takes place between two individuals.
But this transaction can have endless complexities 🔄
What will be the rate of interest and tenure of the loan?
Can the borrower make prepayments?
What if the borrower is unable to pay the lender back?
➡️ Enter NBFCs-P2P!
NBFCs-P2P: Facilitating Lending and Borrowing Among Individuals 💸
NBFCs-P2P are RBI-regulated facilitators of P2P lending and borrowing.
They match lenders with borrowers and simplify the entire process 👬🏻
There are about 26 NBFCs-P2P registered with the RBI today.
The RBI has Problems with NBFCs-P2P 🚨
Unlike traditional banking, the P2P industry is only about 10 years old and in its nascent stage.
This means while there are regulations in place, they may not be very well-defined and open to creative interpretations.
The RBI has pointed out these creative interpretations and laid down regulations more clearly.
Many are calling this the ‘death of P2P’ and it may very likely be so.
Let’s look at the major new guidelines that the RBI has defined:
Call it Lending ✅, Not Investing ❌
P2P lending products have always been advertised, marketed and sold as ‘investment’ products with indicative returns.
But that’s not what’s happening. You are lending your money and not investing it in securities like stocks, bonds or gold.
The Risk Belongs to the P2P Lenders Alone 📉
To deliver the advertised returns to the lenders, NBFCs-P2P absorbed the losses from defaults at their end.
The RBI has instructed all credit enhancements and guarantees be stopped and the risk and defaults to belong to the P2P lenders alone.
Closed Groups are Not Allowed 🚫
NBFCs-P2P had created closed groups for certain partners who offered P2P lending on their app/platform.
For example: For CRED Mint, Liquiloans created closed groups of borrowers and lenders who are CRED users with high credit scores.
Capping P2P Lending and Borrowing 📵
A lender can lend a max. of ₹50 lakh across all NBFCs-P2P
A borrower can borrow a max. of ₹10 lakh across all NBFCs-P2P
Note: These are not new guidelines
Move the Money Quickly 💸
NBFCs-P2P are facilitators. They should be taking money from lenders and transferring it to borrowers quickly.
The RBI suspects this wasn’t happening so it has said that now the money can be parked in escrow accounts for a maximum of 1 day now.
Define Your Fees Clearly 💯
NBFCs-P2P based their fees on two factors: advertised returns and defaults.
So, whenever defaults were high, they would absorb them by reducing their fee to be able to deliver the advertised return.
Now, the RBI has asked the fees to be defined at the time of lending.
RBI’s ₹4 Crore Fine on Liquiloans and LenDenClub 🛑
Within a few days of releasing the new guidelines, the RBI has imposed fines of close to ₹4 crore on two major NBFCs-P2P: Liquiloans and LenDenClub.
The fines were imposed for violating key guidelines and norms defined in 2017.
The new guidelines and fines in a span of 1 week is a clear message to the NBFCs-P2P by the RBI: Get in line!
NBFCs-P2P Pause Operations 🚫
To enhance their systems and processes that comply with the RBI’s new guidelines, most NBFCs-P2P have paused their operations.
So, they are not servicing new lenders or borrowers. Additionally, the existing investments may not be accessible for a while.
If you are an existing investor: Don’t worry. It is very likely that your money is safe but just not accessible at this point in time.
Cheers,
Madhu,
Founder, Altcase