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NBFC-P2P Lending Platform

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August 29, 2024

Why in news?

The Reserve Bank of India (RBI) has launched a crackdown on some P2P lending platforms for regulatory breaches, including Ponzi-like schemes, illegal deposit-taking, and aggressive recovery methods.

What is NBFC-P2P lending platforms?

  • NBFC-P2P- It is the Non-Banking Financial Company - Peer-to-Peer lending platforms are financial intermediaries.
  • Role – It enables direct borrowing and lending between individuals, bypassing traditional financial institutions.
  • It offers accessible credit to underserved groups and attractive investment options for lenders.
  • Tech-Driven credit solutions- They use technology to assess the creditworthiness of borrowers, match them with suitable lenders, and facilitate loan transactions.

                   NBFC-P2P

Regulation in India

  • It is regulated by the Reserve Bank of India (RBI).
  • Mandate registration- Only NBFCs can register as P2P lenders with permission and must obtain a certificate of registration.
  • Capital limit- The RBI sets a minimum capital requirement of Rs. 2 crores to set up a P2P platform.

What are the concerns highlighted by RBI?

  • Breaching of regulations – They significantly have high balances in escrow accounts.

An escrow account is a bank account that holds money or assets until certain conditions are met by the parties involved in a transaction.

  • There has been high non-performing asset (NPA) levels.

A NPA is a loan or advance for which the principal or interest payment remained overdue for a period of 90 days.

  • Delayed disbursement - Funds transferred by lenders not being immediately disbursed to borrowers, kept in escrow accounts for long periods while assured returns were provided.
  • Non-compliance- There is a violation in net owned fund and disclosure requirements.
  • Operating models allowing premature recall of funds by lenders, which were replaced by new lenders without transparency.
  • Profit Margins and High Interest- No cap on interest charged to borrowers, leading to exorbitantly high rates.
  • Platforms profiting from the spread between the returns paid to lenders and the interest charged to borrowers.
  • Capital diversion- Risk of capital diversion from banks and similar financial institutions due to the appeal of high assured interest rates and immediate liquidity options.

What are the new guidelines by RBI?

             RBIonP2P

  • Deposit controls – They are prohibited from accepting public deposits, lending directly, or arranging guarantees for lenders.
  • Loan Disbursement Rules- Loans should not be disbursed unless lenders and borrowers are matched according to a board-approved policy.
  • Transactions between lenders are now prohibited.
  • Monitoring transactions - All fund transfers between lenders and borrowers must be conducted through escrow accounts.
  • Funds in escrow accounts must not remain there for more than one day beyond the date of receipt (T+1 rule).
  • Prohibition on early withdrawals- They can no longer offer early withdrawals or liquidity options that allowed lenders to exit before the maturity of loans.
  • Disclosure of losses- The RBI mandates full disclosure of any losses incurred by lenders on principal or interest which aims to enhance transparency and risk awareness.
  • No investment product promotion- They must not promote peer-to-peer lending as an investment product offering features like assured minimum returns or liquidity options.
  • Prohibition on Cross-Selling- NBFC-P2P platforms are prohibited from cross-selling insurance products that act as credit enhancement or credit guarantees.

                   ImpactonP2P

What lies ahead?

  • A robust regulatory framework is essential to ensure the stability and credibility of the P2P lending market.
  • Refining guidelines to safeguard both borrowers and lenders.
  • Educating potential borrowers and lenders about the P2P lending model, its benefits, and its risks is crucial.
  • Building and maintaining trust is crucial for the success of P2P lending platforms.
  • Adopting best practices and leverage new age technologies to overcome challenges and achieve sustainable growth.

References

  1. Business Standard| Issues with P2P Lenders
  2. Business Standard | New Norms for P2P lending platforms
  3. Business Today| Impact of new Rules on P2P Lenders
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