RBI plans to monitor peer-to-peer lending

The Reserve Bank of India (RBI) will soon release a discussion paper on unregulated peer-to-peer lending (P2PL) arrangements, which is lending money to unrelated individuals without assistance from any financial intermediary.

Several online portals have sprung up in India to facilitate such lending, some even getting private funding from investors, but it is still at a nascent stage compared with countries such as the US and China. In the US, the space is regulated and there are talks that China would bring regulations around P2PL arrangements. One such P2P lending platform Faircent.com recently received funding from T V Mohandas Pai, head of Aarin Capital Partners.

“RBI is actively studying P2PL arrangements that are slowly gaining traction. While recognising the need for innovative products and services, we should be conscious about the risks that may emanate out of such innovations,” said  Deputy Governor R Gandhi at the first non-banking financial companies (NBFCs) summit by the Confederation of Indian Industry (CII).

Based on a detailed study, the central bank intends to bring out a discussion paper for public consultation, Gandhi said in his keynote speech. The deputy governor did not divulge much on the issue. Such lending platforms can also be registered as a separate class of NBFCs, he said.

However, the overall number of NBFCs have fallen steadily, even as the business has increased, over the years, as the central bank tightened regulations around them. From 51,929 in 1997, the total number of NBFCs as on September 30, stood at 11,769. Assets grew from Rs 75,913 crore as at March-end 1998 to Rs 16,10,729 crore at end September  and share of NBFC assets as a percentage of scheduled commercial banks’ assets had increased from seven per cent in 1998 to 14.8 per cent in March 2015, Gandhi said. There are 202 non-deposit taking systematically important NBFCs, with asset size of Rs 500 crore and above.

The overall deterioration in asset quality in the economy has impacted the NBFC sector as well, and the sector’s gross bad debt ratio stood at 4.1 per cent as on March. But, the business model of NBFCs “is inherently risk-prone", Gandhi said. “Weaker underwriting standards, enhanced risk-taking capabilities and increased complexity of their activities cause concerns.”

Besides the business model, NBFCs are exposed to contagion effect and are more prone to systemic risks on account of concentration of exposure to specific sectors.

Besides asset-liability mismatch-induced liquidity risks, dependence on bank funding increases the risk of interconnectedness.  

“All told, these risks can quickly escalate as solvency risks and lead to systemic risk as well,” Gandhi warned, requiring careful and continuous monitoring.

According to Gandhi, “the prospects for the sector in the medium-term are not going to be uniform.” While the NBFC microfinance sector would continue to shrink after converting into small finance banks or merging with each other,  infrastructure and investment companies will have bright prospects in a rising economy, Gandhi said.

NEW MODE OF LENDING

• Several online portals have sprung up in India to facilitate P2PL arrangements
   
• RBI is actively studying these P2PL arrangements
   
• In India, this kind of lending facility is still at a nascent stage compared to US and China
   
• P2P lending platform Faircent.com recently received funding from T V Mohandas Pai