RBI mulls allowing P2P firms to diversify risks by entering secured lending

The Reserve Bank of India (RBI) is weighing the possibility of allowing peer-to-peer (P2P) platforms to foray into secured lending. This is to en­able them to diversify the risks emanating from having a completely unsecured book with relatively new-to-credit custo­mers who have been outside the reach of legacy credit vendors.

According to the broad contours of the mechanism that has figured in talks between the banking regulator and P2P players, transactions and fund movement will be through an escrow account. The asset is to be hypothecated in the name of a trustee; in the case of a lea­se, the same will be purchased by the P2P entity and then pledged to the trustee.  

The trustee, in either case, will have the final say in the transfer or sale of the asset to prevent abuse by either the P2P platform or the borrower.

And once the borrower squares off the loan or the lease period is over, the hypothecation is to be removed and the asset is either released to the borrower or sold. The realised value shall be given to the lender through the escrow account.

There has been exponential growth in P2P lending in recent years. According to the RBI’s Financial Stability Report of December 2021 (FSR: December 2021), lending through P2P platforms — a non-banking financial company (NBFC) variant — made up for a small portion of overall NBFC lending at Rs 2,093 crore (as on September 30, 2021). “There was a significant traction in activity during the pandemic period with threefold growth in both credit intermediated and number of lenders,” noted the FSR: December 2021. This was mainly due to the fact that investors searched for higher yields in a low interest-rate environment.

In terms of credit extended by category of NBFCs, investment and credit companies and infrastructure finance companies predominated, with a share of 52.2 per cent and 44.0 per cent, respectively, as on September 30, 2021.

It is said the current exposure of P2P firms is now closer to Rs 4,500 crore — more than double what the RBI’s FSR: December 2021 stated — and total originations (that is, loans extended before netting what has been repaid) by the industry is way higher at nearly Rs 15,000 crore. The issue is while these amounts may be small, given the small average ticket sizes of Rs 22,000 per loan, they cover millions of customers.

The RBI earlier this year had lowered the qualifying assets threshold for micro-finance institutions (MFIs) to 75 per cent of their net assets from 85 per cent to reduce concentration risks. Though P2P firms and MFIs don’t technically cater to the same segment, the issues on the risk front aren’t dissimilar. It is surmised that P2P players may be allowed to give gold and auto loans.

Since their inception nearly a decade ago, P2P players have set up in-house collections, recovery, and legal teams. The processes are akin to what banks and NBFCs follow. Sources in P2P firms pointed out that they have conveyed to the banking regulator that they be given the same rights as other regulated entities when it comes to the recovery of assets.

A senior P2P industry executive said entry into secured lending will also call for access to the Central Registry of Securitisation Asset Reconstruction and Security Interest of India (CERSAI). A CERSAI registration helps lenders access information on assets to ascertain whether a previous charge has been created on them.

New vistas

• Rs 4,500 cr is the expected exposure of P2P firms currently
• 3x jump between March 2020 and Sept 2021 in P2P lending to Rs  2,093 cr (FSR: December 2021)
• The new secured lending model may see the use of an escrow account
• The asset is to be hypothecated in the name of a trustee; in the case of a lease, the same will be purchased by the P2P entity and then pledged to the trustee
• The trustee will have the final say in the transfer or sale of the asset
• P2P firms may seek access to the CERSAI