The Reserve Bank of India (RBI) on Friday tightened the rules for peer-to-peer (P2P) lending platforms, prohibiting them from taking any credit risk, offering credit enhancement or providing guarantees.
In revised guidelines, the RBI said a P2P platform should not promote peer-to-peer lending as an investment product with features like tenure-linked assured minimum returns, liquidity options, etc. The banking regulator has observed violation of rules by some entities, prompting it to issue revised guidelines.
“NBFC-P2P shall not assume any credit risk, either directly or indirectly, arising out of transactions carried out on its platform,” said the notification. “In other words, entire loss of principal or interest, or both, if any, in respect of funds lent by lenders to borrowers on the platform shall be borne by the lenders and adequate disclosures to this effect shall be made to lenders,” the RBI said.
The revised norms come into effect immediately, the central bank said.
P2P platforms connect borrowers and lenders online, bypassing traditional institutions for direct transactions. This form of lending has been growing, but its overall size in comparison to traditional banking still remains small – currently it is estimated at Rs 7,000-8,000 crore.
The RBI said some of the entities adopted certain practices which are in violation of its regulations. “Such practices include, among others, violation of the prescribed funds transfer mechanism, promoting peer-to-peer lending as an investment product with features like tenure-linked assured minimum returns, providing liquidity options and at times acting like deposit takers and lenders, instead of being a platform,” it said.
Such violations, when observed, have been dealt with bilaterally by the RBI for remediation, said the regulator.
An NBFC-P2P shall not cross-sell any product except for loan-specific insurance products, the RBI said.
P2P platform are now required to disclose on its website the portfolio performance, including the share of non-performing assets on a monthly basis and segregation by age. “It may be noted that such disclosures shall also include all losses borne by the lenders on principal or interest, or both,” said the RBI.
No loan should be disbursed unless lenders and borrowers are matched or mapped as per the board-approved policy, it added.
P2P platforms said new guidelines will benefit the industry and provide clarity to stakeholders.
“The new RBI guidelines are positive for the industry and in the best interest of lenders and borrowers. We welcome these guidelines, which give crystal clear directions and set the road map for P2P Lending 2.0. As one of the oldest players, we strongly believe this will strengthen the industry in the long run,” said Bhavin Patel, founder and CEO, LenDenClub.