India’s mushrooming private credit business has attracted considerable attention globally but from the Reserve Bank of India’s perspective, there is no smoke without fire. And the central bank is out to check whether platforms facilitating direct or peer-to-peer lending between individuals are working within its prescribed norms.
In fact, having scoured through the digital payments and digital lending business, the central bank has now set out questionnaires to registered startups in the so-called P2P space earlier this year, according to a report published by ET. We reached out to a few such startups who said the questions were quite straightforward and they were quite kosher answering them.
Some of the questions pertained to the partnership models of the business, especially with regard to customer-facing applications, the cash flows and their sources and the risk-sharing among the partners. Some of the companies that work with NBFC P2P platforms include BharatPe, Cred and Juniper.
Most questions are around the processes
Most of the questions raised by the RBI revolve around partnership models adopted by players in the P2P space. And the reasons are quite obvious as post the release of digital lending guidelines, the central bank has clarified that adherence to regulation lies with the entities who need to provide information when sought.
The obvious issue that the central bank is seeking to address is around the arrangements in place for default guarantees and the interest rates charged by the P2P players. There is also an onus on these players to curtail instances where the licenses are being leased out to partner entities who have their own business interests.
Not the first time RBI has been suspicious
In the past, the RBI had raised concerns around the fintech industry, specifically finding fault with the 100% first-loan default-guarantee arrangements that some of the lenders created. This allowed unregulated entities to absorb a portion of the bad loans if the borrower defaulted on loans provided by other entities.
Experts point out that the RBI is insisting on having total oversight on the debt markets, given that the country is a hive of money lenders who charge exorbitant interest rates from the social underprivileged sections due to lack of awareness about bank schemes in this regard. Hence, they want total control over disbursal, collection, evaluation processes.
Is P2P lending a long term solution?
Per the current scenario, the P2P startups connect the borrowers to the lender without actively involving the transaction itself in terms of evaluation. The RBI is attempting to find out whether any platform is actually guaranteeing instant funds or offering balance sheet support to these enterprises seeking debt.
Some of the officials we spoke to said scrutiny levels went up post September when RBI had come out with the digital lending rate guidelines. The credit opportunity from a P2P approach was considered as an easier approach to cheaper loans for those seeking instant credit – possibly for managing cash flow requirements.
According to the ET report, overall assets under management of this sector stands at between Rs.2500 to Rs.3000 crore. The overall view is that the P2P lending agencies cannot survive on commission income alone and require additional revenue streams, which is exactly what the RBI wants to get more information on.
However, whether the sector grows to its potential depends on how the players find solutions for the credit system in the country. For example, could they be a part of India’s growing digital retail business where instant loans would go a long way towards improving offtake. But, that’s another matter to be discussed in a later post.