RBI reins in peer-to-peer lending practices after finding rule violations

India's central bank has told peer-to-peer lending platforms to halt certain activities after inspections found rule violations and misleading sales practices, four sources with direct knowledge of the matter said.
 

The Reserve Bank of India, also the country's banking regulator, conducted inspections of at least 10 lenders in the fast-growing sector between June and September, said the sources, all industry executives. They declined to be identified because discussions with the regulator are not public.
 

They added that some lenders had already begun halting certain services and practices in line with the central bank's guidance, while failure to comply could risk future penalties or restrictions.
 

The Reserve Bank of India did not respond to a request for comment. The six largest lending platforms, of 24 doing business in India, also did not respond.
 

The regulators found a variety of violations and questionable practices, including improper relending of repaid funds and marketing of products as an alternative to bank deposits, the sources said.
 

India's regulators have been intensifying their scrutiny of rapidly growing consumer finance services, including peer-to-peer lending, which industry executives estimate is worth 80 billion to 100 billion rupees ($960 million-$1.20 billion) in assets under management.
 

The regulators recently raised capital requirements for lenders, including non-bank financial companies, against personal loans they give out.
 

Peer-to-peer lending, which sidesteps banks and financial institutions by connecting individual lenders with borrowers, has grown to $407 billion globally as of last year, according to a report by Future Market Insight.
 

But several countries including China and Indonesia have in recent years curbed the platforms' activities following large-scale defaults and consumer complaints.
 

The regulatory inspections found that some Indian peer-to-peer lenders were boosting their transaction volumes by improperly allowing other financial institutions to lend via their platforms, one of the sources said.
 

The source, a senior executive at a peer-to-peer lender, added that the central bank had told lenders to stop marketing their platforms as an alternative to bank deposits, which regulators determined was mis-selling.
 

"RBI has categorically told us not to compare the product with savings or fixed deposits," the source said.
 

The four sources also said some lenders were automatically relending funds repaid by borrowers without proper authorisation from the lender, also a violation of banking regulations.
 

"There have been certain instances where P2P lenders were not acting in the spirit of the P2P lending guidelines, where the platform is supposed to only act as a marketplace," said Rohan Lakhaiyar, partner at Grant Thornton Bharat's financial services risk division.