RBI Enhances Scrutiny of P2P Lenders Citing Violation Of Guidelines

RBI Enhances Scrutiny of P2P Lenders Citing Violation Of Guidelines

Directs platforms to share their financial data

The Reserve Bank of India (RBI) has increased scrutiny of peer-to-peer (P2P) lending platforms on noticing guidelines being flouted by underplaying risks through promises of high or assured returns.

Recently, the regulatory bank sent emails (giving a 24-hour deadline to respond) to certain platforms, seeking information about their onboarding process, customer profiles, agreements with lenders, and IT systems. It also sought details on Income Tax Returns, assets under management, and financials.

The P2P lending has come on the RBI’s radar, as some platforms were perceived to have defected while processing KYC (Know Your Customer) aspects.

The RBI corresponded with licensed platforms, besides conducting supervisory visits at their New Delhi and Mumbai offices since September last. It also suggested post-reviews and corrective measures to the firms.

However, the recent communication was restricted to those who had yet to implement the changes or had not submitted satisfactory details.

One of the founders informed, “We have been in touch with the RBI since last year. They have been seeking details on customer onboarding, lender agreements, partnerships with other apps, and how transactions are structured. Some of the norms are misinterpreted and incorrectly followed, which we are changing.”

The P2P non-banking finance companies are the latest on the RBI’s radar after pre-paid instruments (PPIs) and digital lending. The banking regulator had laid out detailed regulations for the segment in 2017, with some revisions introduced two years later.

Besides independently offering products on their respective platforms, licensed P2P-NBFCs including LendenClub, Lendbox, Liquiloans, Faircent, and Finzy forged partnerships with apps such as BharatPe, Cred, Mobikwik, and Vested Finance to source new customers.

With the segment gaining popularity as an alternative investment proposition among borrowers and lenders, the regulator stepped in to take an overview, which revealed discrepancies.

This was amplified by M Rajeshwar Rao, the deputy governor of the RBI who stated, “NBFC-P2Ps have underplayed the risks through various means such as promising high/assured returns, structuring the transactions, and providing anytime fund recall facilities. Any breach of licensing conditions and regulatory guidelines is non-acceptable.”

One of the key features that irked the RBI was the agreement between the platform and the lender, where the former was required to give all ‘control points’ to the latter to choose the loan structure. This included details on the borrower's identity, loan amount and tenure, and credit score, which was to be provided by the platform, followed by a unique agreement for each borrower.

However, some platforms ignored it and pooled in a large sum from lenders and disbursing loans with blanket consent.

Speaking on the issue, a banker remarked, “The P2P-NBFCs are acting like deposit-taking NBFCs, offering fixed returns to lenders. They have forgotten the line and will now have to face the music.”

On the checks by the RBI, Bhuvan Rustagi, the co-founder of Lendbox, agreed to certain deviations by companies from the RBI guidelines, terming them as misinterpretations.

He stated, “We have sought more clarity from the regulator on some points. These are hygiene checks, and the RBI wants to know how businesses have evolved since 2017.”

Rustagi added that the firm implemented 95 percent of issues pointed out by the RBI and sought clarity on the remaining 5 percent.

An executive of another firm said they were flagged for ‘underplaying the risk’ of the investment to the lender. “We never underplayed the risk. There are no guarantees or returns assured. The declarations are duly signed by the lenders, but we have now made them clearer and defined,” he added.

Some P2P-NBFC platforms allowed lenders to withdraw their funds at any time, a practice not permissible.

Meanwhile, Bhavin Patel, the co-founder of LenDenClub expressed, “We were guided by the regulator late last year and took immediate steps to stop the product. Now we are offering whatever tenure the lender wants to offer. We changed the construct of the product. There could be other players still doing that, and that’s where the governor’s comment comes in.”

The P2P platform, which tied up with BharatPe to offer loans, said it had run down the portfolio and completely halted the partnership. Consequently, Patel expected some impact on the volumes but not on revenue margins because the fee charged remained the same.

Since the scrutiny, a 12-member association of the P2P platforms has been engaging with the RBI to discuss the issues. Early this year, some of them met the RBI’s Department of Regulation and Supervision to explain their business models, products, and risks.

As the stakeholders take a ‘wait and watch’ approach while implementing the corrective measures set out by the RBI, some are anticipating the FAQs to be revised or an additional set of guidelines.

The co-founder of LenDenClub remarked, “The RBI never takes arbitrary action immediately. They give ample time to companies to take corrective actions. So far, the conversation has been going in a positive direction.”