RBI takes away the punch bowl, just when the P2P party was warming up

Mumbai: India's peer-to-peer (P2P) lenders are staring at an existential crisis, after the banking regulator halted many of the practices that made the industry what it is today.

The Reserve Bank of India (RBI) on Friday barred P2P platforms from offering minimum returns, instant liquidity options and promoting P2P as an investment product. These platforms, which are supposed to bring together lenders and borrowers, are often found acting like deposit-takers and lenders, RBI said, in revised guidelines that take effect immediately.

Individuals who lent on these platforms assuming they can get back their money anytime they want may be disappointed on Monday as the P2P firms and their fintech partners rush to comply with the circular, two senior P2P executives said on the condition of anonymity.

According to them, the circular brings India's P2P lending platforms to a grinding halt, a sector they said had 1-1.5 million lenders who have lent an estimated ₹10,000 crore. Some of the leading P2P lending platforms in India are Liquiloans, RupeeCircle, India P2P and Faircent.

Also read: Why liquid schemes of P2P lenders are set to hibernate

India's P2P industry has made rapid strides over the past four years, through partnerships with fintechs like BharatPe and Cred. BharatPe has a 12% club and Cred has a 9% club for P2P, where they offer returns up to 12% and 9% respectively. Both tie-ups functioned initially on closed groups where the fintech's users borrowed and lent money. This practice has also been banned by RBI.

“As the circular was issued post market hours on Friday, we are in the process of assessing the impact and the P2P lending association shall engage with the regulator soon; meanwhile, we have started working on the technology to implement the requisitechanges,” said a spokesperson for Liquiloans, India's largest P2P lending platform.

A screenshot of a communication by India P2P said it was immediately halting deposits and withdrawals. Mint could not reach an India P2P spokesperson to confirm the veracity of the screenshot. Lendbox and Faircent did not respond to messages.

P2P lending was conceived to help individuals lend to other individuals over a platform, with loans being repaid at the end of the tenure. Over time, P2P platforms began offering so-called instant withdrawals - meaning, after a three-month lock-in period, the lender could get back money even before the actual loan was repaid, as the platform shuffled loans around.

This, and a feature whereby the platform would offer some protection against the loan default, attracted more people willing to put in their money. The platforms themselves began profiting from the spread between the lending rate and the borrowing rate, just like a bank.

Also read: RBI says depositors can seek premature withdrawal of deposits opened with NBFCs: All you need to know

Friday's RBI circular barred instant withdrawals, meaning the individual lender must wait till the end of the loan tenure to get the money back. All loan repayments must go into an escrow account, and a day after the borrower repays the loan, it must be handed back to the individual lender. It also said P2P platforms must charge fixed fees for their services, and not use the lending-borrowing spread as the route to profits.

A third executive at a fintech associated with a P2P NBFC expressed hope that RBI may clarify that existing loans are grandfathered and permit withdrawals in the consumer interest.

The first two executives said industry representatives hope to meet RBI officials this week to request more time to comply with the circular, or spare loans extended so far from the new guidelines. Another solution could be to get a bank or NBFC to buy all the loans en masse. However, these negotiations will take time. It will also need the consent of borrowers and lenders.

Previously, RBI had also banned first loss default guarantee (FLDG) offered by some fintech partnersofP2PNBFCs.