Decoding RBI's new regulations for peer-2-peer lending

The Reserve Bank of India’s master directions declaring peer-2-peer lenders non-banking finance companies released in October were welcomed by the industry for helping legitimize P2P lending by recognizing these firms are non-banking financial companies (NBFCs) – companies that can extend loans but not take deposits.
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Apart from making registration of P2P lenders compulsory, the central bank has also prescribed stringent norms pertaining to scope of work and disclosure that will ensure that will prevent proliferation of Ponzi schemes under the guise of P2P lending.

RBI may have taken cognizance of the $9-billion Ezubao scandal that took place in China last year. Ezubao, a P2P lender on paper but a Ponzi scheme in principle, had duped investors by promising unreasonably high returns.

In this blog post, we will run you the key sections of the new regulations and what they mean for the P2P portals as well as third-parties building fintech solutions for them.

Registration

Every NBFC-P2P (non-banking financial company peer-2-peer) company shall have a net worth of Rs 2 crore or higher and will have to mandatorily get a certificate of registration from RBI. This will ensure that spurious fly-by-night lenders will be disincentivised. Note: Make sure the platform you access is registered.

Prospective P2P lenders have been given 12 months to register with the central bank. This means in case you are keen on starting a P2P portal you have time on your hand but the net worth clause still holds.

Another important thing this will accomplish is bring in more trust in the P2P lending ecosystem, which is absent at present.

Credit assessment and credit scores

All NBFC-P2P lenders are required to undertake credit assessment and risk profiling of the borrowers and disclose the same to their prospective lenders. Many portals do this now too but it was not mandatory. 

Also, your data will automatically go to one of the four credit information companies (CICs) – CIBIL, Experian, Equifax and CRIF High Mark – recognized by the RBI to give credit scores to borrowers. Unlike before, this will help you develop a credit score even while accessing a P2P lending portal.

However, there is lack of clarity of how this will happen for enterprises as the above mentioned CICs give out individual credit scores. Enterprise-level credit scoring is a key challenge and the central bank can do well to shed some light on the issue.

Borrowing and lending limits

The aggregate lending and borrowing limits are capped at Rs 10 lakh across all platforms. This means your total exposure to the P2P system, irrespective of your being a lender or a borrower is Rs 10 lakh. This will be made possible because the KYC requirements will be common across all platforms and your PAN card will carry information of how much you have invested in or borrowed through P2P portals.

Moreover, borrowers have to give a guarantee that they abide by this norm when they register on a new portal. This way RBI has explicitly capped the risk that can emanate from the sector as a whole using this norm.

The exposure of a single lender to the same borrower, across all P2Ps, shall not exceed Rs 50,000. Remember that P2P lending is marketed as an alternative investment instrument and by capping the exposure to one borrower, RBI has made diversification compulsory. Moreover, the tenure of the loans cannot exceed 36 months making all liabilities short to medium-term in nature.

Matching borrowers and lenders

NBFC-P2P portals will have to set rules for matching lenders with borrowers in an equitable and non-discriminatory manner. This is a tricky part and may be neglected by the portals as their terms and agreements leave the responsibility of selecting the borrower, in other words his investment, completely on the lender. At present, the P2P portal only provides you a credit assessment and the platform on which a lender can select a borrower. But now, the onus of ensuring the non-discriminatory nature of the portal will rest on the company.

Transparency

In terms of transparency, the central bank has mandatory for companies to disclose the following on their websites: Overview of credit assessment and score methodology; disclosures on usage and protection of data; grievance redressal mechanism; portfolio performance including share of non-performing assets on a monthly basis and segregation by age; and its broad business model.

As of now most websites practice these disclosures but in a manner not easily accessible to would be borrowers and lenders. For instance, you will generally not be able to access the overview of the credit assessment and score methodology.

Since credit assessment is one of the most important among all process followed in sanctioning of a loan this norm is significant and will also help develop alternate but transparent methodologies.

Outsourcing norms

The RBI has provided a lengthy annexure dealing with outsourcing of financial services by P2P lending companies and is section you should peruse in case you are a software-as-a-service company thinking of providing solutions to P2P lending companies.

The norms state that outsourcing of any activity by NBFC-P2P should not diminish its obligations therefore making the company responsible for the outsourced activity. This will make it difficult for upstarts to convince already established P2P lenders to outsource key features such as credit assessment etc.

Broadly, the regulations state that NBFCs shall not “outsource core management functions including internal audit, strategic and compliance functions and decision-making functions such as determining compliance with KYC (know-your customer) norms for opening deposit accounts, according sanction for loans (including retail loans) and management of investment portfolio”.

Although, NBFCs will not require prior approval from RBI to outsource services they will be subject to scrutiny by the central bank.

In general if you are a SaaS company keep in mind the should keep in mind that your service positively impacts these criteria: Level of importance of the activity; potential impact on financials; likely impact on the reputation and brand value and cost of the outsourcing.

Conclusion

At NullPointer, we feel RBI's regulations are a welcome step as the P2P lending sector holds vast potential, both in terms of increasing credit penetration and as an alternative investment opportunity for retail investors. What we expect is more clarity on enterprise level P2P lending and how credit assessment and borrowing limits will be treated in this case.

We also feel that these regulations offer significant scope for innovation in terms artificial intelligence and blockchain applicability considering that there is a lot of emphasis on transparent credit assessment, data security and equitable treatment of users.