India’s P2P Lenders Push Back on Proposed Central Bank Rules

  • Central bank seeking feedback on proposals before end of month
  • RBI wants to ward off ‘China-like’ incidents: i-lend founder

India’s peer-to-peer lenders are pushing back on central bank proposals to regulate the online platforms, arguing the new rules would hamper the development of an industry in its infancy.

Firms such as Lendbox and LenDenClub argue that suggested rules in a Reserve Bank of India discussion paper last month treat them like banks with their own loan books, when they’re actually web platforms that connect individual borrowers with a pool of lenders.

The Reserve Bank of India is seeking feedback by the end of the month on the rules, which recommend the firms adhere to a leverage ratio, a capital requirement and incorporate themselves as non-bank finance companies. The central bank is preparing a regulatory environment for a nascent industry before it reaches the scale seen in countries such as China, which has more than 2,000 P2P platforms. India has 30, a number that tripled in the past year.

Some of the rules are “not relevant in the case of P2P lenders, as we are just a marketplace with no balance-sheet exposure,” said Ekmeet Singh, chief executive officer of New Delhi-based Lendbox. “We expect the final rules to be those that wouldn’t take away the edge of disruptive force that P2P lending brings to the lending business.”

The central bank is not the only national regulator scrutinizing new financial technologies such as peer-to-peer lending. While some countries such as Singapore are taking a more relaxed approach to regulation as they focus on the benefits of innovation, others are tightening regulations to curb emerging risks. China has toughened its P2P rules after a number of failed platforms and suspected fraud cases.

For a QuickTake explainer on peer-to-peer lending, click here.

Many of the RBI’s proposals “have been put in place as the regulator wants to ward off China-like incidents,” said VVSSB Shankar, founder of i-lend, which he says is India’s first P2P lender. Shankar said he’s seeking more clarity regarding the cap on leverage ratios, which measure a company’s ability to meet its financial obligations. The RBI didn’t offer any levels for the ratio in its discussion paper, or outline which parameters would be used for its calculation.

The central bank is also proposing that all P2P firms hold 20 million rupees ($300,000) of capital in reserve. A figure that high could discourage some individuals from joining the industry and stifle innovation, according to Bhavin Patel, LenDenClub’s CEO.

RBI spokeswoman Alpana Killawala didn’t respond to an e-mail seeking comments regarding the concerns raised by the P2P companies.

Light Fingered

Kalpesh J Mehta, a partner for Deloitte Haskins & Sells LLP’s financial-services practice in Mumbai, has a more positive view of the central bank’s rules, saying that they’re “light-fingered” proposals that address most of the risk areas and will boost investors’ confidence in the industry. They don’t offer any constraints that could destroy the P2P industry, Mehta said.

The firms, also known as marketplace lenders, offer online platforms that allow borrowers to seek loans directly from other individuals, often at cheaper interest rates than those available at banks. Use of technology to cut down operating costs and margins allows these marketplaces for loans to offer significantly higher returns to creditors than traditional bank deposit rates.

Fairassets Technologies India Pvt’s Faircent, often touted in local media as one of the country’s largest P2P platforms, says it offers borrowers rates that range as low as 12 percent and creditors returns of up to 25 percent, according to its website.

No Deadline

I-Lend’s Shankar estimates that P2P loans in India may reach 600 billion rupees in coming years, but he couldn’t say how much it was currently worth. Lendbox’s Singh says his firm is already one of the nation’s biggest P2P lenders even though it’s only been operating for six months, having handled 35 million rupees of loans. That’s the same size disbursed by Faircent, according to figures supplied by the company.

By comparison, China’s P2P industry had 440 billion yuan ($67 billion) of outstanding loans at the end of 2015, according to research firm Yingcan Group.

The RBI hasn’t given a deadline for publishing its final rules for the industry. Among the other rules suggested by the regulator in its April 28 discussion paper: 

  • Companies shouldn’t assure any returns to individual creditors

  • P2P firms should maintain brick-and-mortar offices in India

  • Company management and operational professionals should be based in the country

  • Individual creditors’ exposure to single borrowers or segments should be limited.