Photo: Aniruddha Chowdhury/Mint
Photo: Aniruddha Chowdhury/Mint

Mumbai: The Reserve Bank of India (RBI) on Thursday initiated steps to regulate the nascent and hitherto unregulated peer-to-peer (P2P) lending business. RBI has proposed registering P2P lending platforms as non-banking financial companies (NBFCs).

The banking regulator put out a discussion paper on P2P on its website on Thursday.

Online P2P lending companies work as marketplaces that bring individual borrowers and lenders together for loan transactions without the intervention of traditional financial institutions such as banks and NBFCs.

RBI said it would be “prudent” to regulate the business because of “the impact it can have on traditional banking channels” and NBFCs and its “potential to disrupt the financial sector and throw up surprises”.

In 2015 alone, around 20 new online P2P lending companies were launched in India. At present, there are around 30 start-ups in the P2P lending business in India.

The banking regulator sees a role for P2P lending, as evident in its paper, and its language seems to suggest the kind of light touch people prefer when a regulator sets out to define the rules for an emerging business.

“The balance of advantage would lie in developing an appropriate regulatory and supervisory toolkit that facilitates the orderly growth of this sector so that its ability to provide an alternative avenue for credit for the right kind of borrowers is harnessed,” the paper said.

“The guidelines should strike a balance between overregulation and leaving too many loopholes. If guidelines are too strict and harsh, it will bring down the P2P market. If P2P isn’t well regulated and things get ugly, the government will come back with heavy restrictions. But, in any case, the guidelines will bring awareness about the sector and more individual lenders will come on board,” said Abhishek Goyal, co-founder and chief executive, Tracxn, a data analytics company, which has invested in P2P lender Loanzen.

So, what are the proposed regulations?

The regulations

—P2P companies must act only as intermediaries and their role must be limited to bringing the borrower and lender together. This basically means that P2P lenders cannot take on the functions of a bank and seek and keep deposits.

—Funds must move directly from the lender’s account to the borrower’s account to prevent risk of money laundering.

—P2P platforms can’t assure returns to lenders.

—The companies must have a minimum capital of Rs.2 crore.

—The platforms may have to adhere to a leverage ratio so that they do not expand indiscriminately.

—Since lenders may not be sophisticated, there may be limits on maximum contribution by a lender to a borrower/segment of activity.

—Promoters, directors and chief executive officers of P2P platforms will have to meet a so-called “fit and proper” criteria.

—Some proportion of the board members of such platforms may need to have a background in finance.

—P2P platforms may be required to have a “brick-and-mortar” presence in India.

—Platforms will need to submit regular reports on their financial position, loans arranged each quarter, complaints and so on to RBI.

—Since RBI can only regulate companies and co-operative societies (and not individuals, proprietorships, partnerships or limited liability partnerships), all P2P platforms may have to be structured as companies.

—The platforms will have to guarantee confidentiality of customer data.

—Loan-recovery practices of the P2P platforms will need to adhere to existing guidelines on recovery practices.

However, the RBI paper is silent on credit risk profiling of the borrowers.

“RBI has not touched on credit risk score, such as details on alternate credit risk. It takes a while before risks start showing. Hence, stricter governance is needed in this space,” said Vivek Belgavi, partner, fintech leader, PricewaterhouseCoopers India.

The reactions

While welcoming the proposals listed in the paper—the general opinion is that the regulations will lend respectability to the nascent business—experts, investors, and executives in P2P platforms highlighted some concerns.

The first has to do with the fact that the money has to move directly from lender to borrower without an “escrow account”.

“It is necessary to have an escrow account. You can’t expect the transaction to happen only between lenders and borrowers because it will be tedious from accounting point of view. The platform will need to maintain an escrow account to pool money since there are post-dated cheques involved,” said Infosys co-founder T.V. Mohandas Pai, who is an investor in, a P2P lending company.

“For instance, if an individual wants to borrow Rs.10 lakh and there are 10 borrowers willing to pay Rs.1 lakh each. Ideally all lenders should pool the money into an escrow account. But this is not allowed and the borrower needs to take 10 loans of Rs.1 lakh each,” explained Tracxn’s Goyal.

P2P platforms recommend either an escrow or a nodal account.

“In case of fund transfer, there should be a mechanism in place where the P2P lending platform is in the loop on all transactions. It can be like a nodal account that an e-commerce company like Flipkart has for sellers and buyers,” said Vaibhav Pandey, founder,, another P2P lending platform.

And a prescribed leverage ratio for the platforms makes no sense because “credit doesn’t come from the platform. What the regulator can do is ask the P2P lenders to create a credit insurance fund to offer some kind of relief in case of default”, said Pai.

But that apart, most of the proposals met with the industry’s approval.

Pandey said it is a good idea to disallow P2P platforms from promising assured returns “because you don’t want lenders on these platform to get trapped into believing that they will get assured returns”.

And the Rs.2 crore capital requirement “seems adequate to develop a robust P2P sector along with the business continuity plans which will come to the rescue in times of business collapse,” said Naresh Makhijani, partner and head, financial services, KPMG. Indeed, the regulator “seems to be conscious of the fact that very strict regulation of this sector may impact its growth in its infancy”, he added.

RBI will accept feedback on its discussion paper till 31 May.