RBI regulations create roadblocks for peer-to-peer lending companies

Is non-bank lending a form of access to credit for those in need or an investment asset class for the well-to-do? That is the question that India’s central bank perhaps grappled with while framing the regulations for the nascent peer-to-peer (P2P) lending companies. 

While the regulations were put up only in November last year, a handful of companies have exited business and many others have changed tack after looking at the guidelines.

The guidelines, which require a company to adhere to them entirely to get a non-bank finance company-P2P licence from the Reserve Bank of India (RBI), place restrictions on a number of things such as the amount that can be borrowed from these platforms as well as how much a lender can give across platforms.

This, the industry says, makes it difficult for high net-worth individuals (HNIs) to participate. The trouble is, the business models of a lot of players depend on HNIs because of their deep pockets and high risk appetite. 

While the industry grew rapidly in the past four years, the latest regulations have put a roadblock for these firms. For instance, the RBI mandates that an investor can lend up to Rs 1 million across all P2P lending platforms. At the same time, an individual borrower can borrow up to Rs 50,000 from a specific lender, thus requiring a lot of diversification in case the sum to be borrowed exceeds that amount. 

For instance, FinMomenta, a Singapore-based company that launched in India in 2016 as a P2P lender focusing on education, shut shop last year after the regulations came in. Brahma Mahesh, chief executive officer of the company, said its plans of tapping HNIs through wealth management companies were marred by the regulatory restrictions.

“That (regulations) came as a cropper for us. The maximum limit of Rs 50,000 per borrower was always there. Even if they want to commit Rs 1 million, they do not want to share risk with others and have 20 borrowers in their portfolio,” Mahesh said.

Mahesh said since all lenders had to approve the loan before it was cleared in the P2P model, adding more lenders to a small portfolio delayed things.

FinMomenta now focuses on digital loans in the education space. It has moved out of the P2P space and will not apply for the licence. 

There are companies such as Faircent that are comfortable with the regulations. Speaking to Business Standard, Vinay Matthews, founder of the company, said there were companies that were shutting shop or moving to a different model because their businesses were based on HNI money.

“Our business is growing strong and we stand by the RBI regulations since this is how the business should be done,” Matthews said. “We have a model where you can contribute just Rs 750 to a Rs 100,000 loan, thus diversifying the risk quite a bit.”

Faircent lends close to Rs 35 million each month and the company has been growing its book at 30 per cent quarter-on-quarter. 

Meanwhile, the Digital Lenders Association of India (DLAI), an industry body, is perturbed by the regulatory guidelines and even talked to the central bank on this but did not receive a positive response from it. 

“The regulations have constrained many players that were targeting HNIs,” said Alok Mittal, president of the DLAI. 

“HNIs do not necessarily want so small an exposure. It would have been more productive in our view to allow these large investors to take a bigger exposure and protect retail investors. In some sense, removing those limits might help platforms to generate more capital and get more sophisticated investors on board.” 

LoanMeet, a Bengaluru-based company, shut down its P2P business, according to two independent sources, due to the regulations. However, LoanMeet’s founder declined to comment on the decision.

Shankar Vaddadi, founder, i-LEND, said: “The RBI wants to see how the sector operates before it relaxes the limits. We have had to tell our lenders who were lending more to cut back. That is the only challenge we have faced.”

This is not all. Trustee regulation, which the RBI has put up, is troubling industry players. The regulation requires a trustee company, which should be promoted by banks, to handle cash flows between the borrower and lender.

Peer through P2P

• Peer-to-peer platforms entered Indian markets five years ago and operate in a completely unregulated space as tech firms

• These platforms connect individual lenders to retail borrowers and offer high interest rate for the risk involved in unsecured loans

• The ticket size is usually high, ranging from Rs 50,000 to Rs 1.5 million

• RBI regulations debar a lender from lending more than Rs 1 million across platforms and a borrower from taking more than Rs 50,000 from a specific lender

• The regulations have created a strain in the business as several companies are planning to shut shop, while others have changed their models