Too restrictive on P2P lending, RBI–Economic Times–09.10.2017

The Reserve Bank of India’s (RBI) directions for peer-to-peer (P2P) lending platforms are welcome, warts and all. Less than adozen of these exist now, to introduce lenders and borrowers online, complete with information on their credit history. P2P lenders became popular in America a few years ago: they mediated $5.5 billion in 2014 and $12 billion in 2015. Last year saw the market shrink to $9.8 billion. P2Ps facilitate loans in return for small commissions.

The mandate makes P2P facilitators non-banking finance companies (NBFCs), which are regulated entities. This facilitates the business, bringing in credibility. So long as a P2P platform complies with technological, prudential and regulatory norms, a minimum capital requirement of Rs 2 crore only serves to limit entry, say, by bright youngsters with tech and analytical savvy, business acumen, lots of energy and little money. The limits on how much credit either a borrower or a lender on a P2P platform can avail of/provide are way too restrictive, and rule out P2P as a means for small business finance. The blanket ban on credit enhancement of any kind by a P2P serves no purpose, and is likely to throttle any development of risk mitigation instruments for P2P loans.

In the US, several P2Ps went belly up between 2015 and 2017. In a low-interest economy like the US, where a 30-year riskless Treasury bond gives 3%, P2Ps charge much higher, arguing that these loans are unsecured, and in case of a default, the lender can do little to recover funds, hence the need to charge high rates on loans. However, the return of financial sanity after the recession has dampened Americans’ reckless borrowing, driving many P2Ps out of the market. The situation in India is different, and P2Ps can play a big role in financial inclusion.

This piece appeared as an editorial opinion in the print edition of The Economic Times.
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