In the ever so evolutionary space of FinTech, the journey of a market starts with payments and slowly moves on to lending and so on. They come in various shapes and sizes:
- Loan aggregators (they are essentially lead generators for banks and NBFC) almost 10-11 years in existence.
- Alternate scoring-based (+traditional) lenders who lend from their own books or work on an FLDG basis with an NBFC (relatively new).
- Crowdfunding (is in existence now for more than seven to eight years).
- P2P lenders: It has been almost three years since P2P lending firms started in India. It’s a difficult business to get borrowers and lenders on the same platform.
P2P lending or more broadly digital lending is challenging traditional lenders globally though only till the time they become part of the similar structure as banks. RBI for the initial period observed the global regulatory landscape and state of these platforms in India. And it was in April 2016 that it came up with a discussion paper. Since then, it held various conversations with industry players to now (04-10-2017) come up with master directions on P2P lending.
Here are my key takeaways from same:
- It will lead to the offering of P2P services in their purest form.
- It will increase the cost of acquiring lenders and borrowers for the marketplace
- Banks (with the assumption they – including SFB – are automatically going to allowed to be in the P2P space) or those platforms who have a large existing base of consumers may be at a huge advantage.
- Some of the large NBFCs who had clear plans of building digital lending platforms (individual borrowers and lending from its book) may want to revisit that thought process.
- A lot of thrust is exerted to being an informed participant. For example, currently, compliance (individual caps) is left at individual borrowers and lenders that may see tightening over a period of time. However, the reporting of P2P borrowers and lenders (by platform) to the bureau is mandatory.
- I don’t think traditional FIs can lend on these platforms (as the participants are only individuals, though this is an open item and up for debate). Therefore, it becomes a true marketplace with matchmaking of borrowers and lenders as the only activity. Leading to no debt on the platform balance sheet. This would also mean that it will become a number game and the platform that will be in a position to throw higher marketing monies initially will have a larger number of participants unless it has an existing base to which it can simply migrate to the platform – like existing banks and NBFC with off-course borrower consent. This will mean significant expenses in bringing participants on the platform.
- Pricing of the services offered is left to the platform leading to price discovery and completion in the market – good for the consumer.
- Banks should be rushing to NBFC P2P platforms to offer trustee services and escrow accounts (great CA float generation opportunity).
- Public disclosure of portfolio performance along with age profile and credit assessment methodology will help lender make an informed call.
- The initial set of participants could be from HNI/UHNI class who intend to invest in a new asset class. Based on platform maturity it may see broad-based participation. It is interesting that RBI has kept an overall lender cap to ensure check on the excess flow of liquidity in a yet to be tested (From Indian context) solution.
- Cost of regulatory compliance will increase.
Highlights from the circular:
- P2P NBFCs (both existing “to apply within three months” and new) will have to apply for CoR (Certificate of Registration).
- Net-owned fund of 2 crores.
- Prospective P2P NBFCs to start business within 12 months of receipt of in principle.
- An online marketplace for borrowers and lenders.
- Not allowed to raise deposits or lend on its own.
- Not allowed to arrange credit enhancement or guarantee.
- Not allowed to offer secured lending.
- Not allowed to hold any fund from borrower or lender in its own balance sheet.
- Allowed to offer insurance linked to loan.
- Not allowed international remittance of funds.
- Allowed to perform credit assessment of borrowers (based on consent) and share same with lenders.
- Required to perform due diligence of all participants in the platform.
- Process necessary documentation, disburse funds and collect repayment (regular and recovery).
- Monitoring various caps on borrowing and lending (as in a single borrower-lender cannot have a relationship of more than 50k across platforms).
- Allowed to set rules for matchmaking borrowers and lenders.
- Required to become a member of credit information companies and share data (including historic) on regular intervals (cost of compliance).
- Required to share mutual identity to lender and borrower including terms of engagement (return, interest, fees, etc.).
- Platform to not provide any assurance to lenders on the recovery of loan.
- Aggregate holdings at an individual or group level at 26%.