Globally, there is no uniformity in regulation of P2P platforms
Reserve Bank of India has recently come out a consultation paper on peer-to-peer lending (P2P lending). P2P lending is a mode of lending that involves an online platform that matches lenders with borrowers in order to provide loans. Typically, P2P lending involves the borrower posting her loan requirements on the website of the P2P platform which is followed up by any lender accepting to grant the loan to the borrower.
For providing these services, the P2P platform charges a fee from the borrower or the lender or both. In the past few years, a few P2P lending portals have been launched in India, with the aim to cater to short-term credit requirements of individuals and businesses. Few of the online P2P platforms in India have developed their own credit assessment criteria to determine the creditworthiness of the borrower that enables any prospective lender to grant the loan.
One of the advantages of P2P lending is that it provides for easier availability of loans at lower interest rates to the borrower, without the requirement of any collateral. What is also attracting the borrowers to raise loans through P2P lending is that it does not involve the long-drawn procedures usually involved in obtaining loans from banks. In case of small businesses, availing credit through P2P platforms has catered to much-needed funding requirements of entrepreneurs.
It is in this backdrop that RBI has proposed to introduce measures to regulate P2P lending services in India. In its consultation paper, it has acknowledged that as of 2015, the cumulative lending through P2P lending platforms globally has reached up to 4.4 billion pounds, as compared to that of 2.2 billion pounds in 2012, i.e., a 100% rise in three years.
At this juncture, it is important to ask how would one view P2P lending platform. Should such platforms be viewed merely as a marketplace where lenders and borrowers connect and lending-borrowing transactions get executed? If so, the need for regulation of such activities does not arise. On the other hand, if P2P lending platform’s activities are considered to be that of an intermediary in the lending sector, then the argument that such activities be regulated would hold good. From the consultation paper, it appears that RBI’s view conforms to the latter argument, and therefore it considers that P2P lending platforms be regulated as a credit sector intermediary.
However, there is no uniformity in regulation of P2P platforms across the world. Countries like Germany and France regulate P2P lending platforms as banks within the purview of their banking regulations whereas countries like the UK and Australia consider P2P lending platforms as credit sector intermediaries. Further, in the US, P2P lending is governed by both federal as well as state laws, whereby the P2P lending platforms are required to obtain licenses in each state in which they operate, along with compliance under the federal laws where each loan is required to be registered.
The very fact that RBI realises P2P lending to be a key component in the near future is extremely encouraging. Further, it would be a step in the right direction if P2P lending, which at present is at a nascent stage in India, is adequately regulated. However, there is always a risk that RBI may end up over-regulating the P2P lending activities.
RBI has proposed that P2P lending platforms be regulated as NBFCs under the Reserve Bank of India Act, 1934. The said statute empowers RBI to notify any ‘non-banking institution’ or ‘class of such institutions’ as NBFCs with the previous approval of the central government. Further, it has proposed that P2P lending platforms always maintain a minimum capital of R2 crore. Given P2P lending platforms will not themselves undertake any lending activities, such minimum capital requirement may prove onerous.
Interestingly, the consultation paper states that lenders on a P2P platform may include uninformed individuals, and therefore there may be prudential limits on maximum contribution by a lender to a borrower/segment of activity. Such a view could be slightly over-reaching, as any lender would provide loans to the borrower after being satisfied about such borrower’s creditworthiness, through the information provided by the P2P lending platform.
Alternatively, instead of placing a restriction on the lending capacity of a lender, the restriction could be on the borrower to obtain loans up to a certain amount from a particular lender within a given span of time.
To sum up, the discussions on P2P platforms initiated by RBI could not have come in at a more appropriate time. What remains to be seen now is whether or not the regulatory measures that follow will trigger an overhaul in the lending activities in India.
With contributions from CV Srikant, associate, J Sagar Associates, Advocates and Solicitors
The author is partner, J Sagar Associates, Advocates and Solicitors. Views are personal