👍👍👍👍👍When P2P platforms act like deposit-taking NBFCs

https://www.business-standard.com/opinion/columns/when-p2p-platforms-behave-like-deposit-taking-nbfcs-123073000534_1.html

excerpts

P2P is an online marketplace or a lending platform, which collects money from individuals and lends to individuals as well as micro and small enterprises. The loans are collateral-free.

In March 2016, the Reserve Bank of India (RBI) issued the first draft on P2P lending for consultation with the stakeholders. The licensing norms were finalised in October 2017. Apart from being “fit and proper” to run the P2P platforms, one must have at least Rs 2 crore net-owned funds.

The RBI has issued around 25 licences so far, but not all of them have gone live. Analysts peg the annual disbursement by the industry last year at around Rs 12,000 crore.

Initially, one could lend Rs 10 lakh. In December 2019, the amount was raised to Rs 50 lakh. A lender can give this money to multiple borrowers across P2P platforms. A borrower, however, cannot get more than Rs 10 lakh, irrespective of the number of lenders. Finally, a lender’s exposure to a single borrower is capped at Rs 50,000.

The interest rate charged to the borrowers is in the range of 18-20 per cent or more, but lower for the customers with high credit ratings.

How does a P2P firm make money? It earns fees from both the lenders and the borrowers. It doesn’t have any balance sheet. Its job is to connect a lender with a borrower.

It cannot raise deposits; neither can it offer any credit enhancement/guarantee facility. It also cannot use the funds received from lenders and repayment from borrowers for lending directly to an entity and cross-sell any financial product, except for insurance cover for loans given. And, it cannot offer any guaranteed returns to the lenders.

Enticing the lenders with almost fixed (using “up to” prefix) return is not done by just one entity. Many are following this formula. Typically, the interest rate offered is the lowest when there’s no lock-in (one can withdraw money anytime one wants). How can this happen when a loan of a particular duration is funded by a lender or group of lenders? By removing the lock-in period, the lender-borrower link is broken. This could lead to serious asset-liability mismatches and create a systemic risk.

I understand that even some of the mutual fund distributors are selling P2P products offering fixed returns (using the “up to” caveat) for a fixed period of maturity.

There are also instances where the P2P platforms are crediting interest to the escrow account of the lenders daily. It is only possible when a P2P platform brokers a loan with a daily repayment arrangement. But that’s not the case. Clearly, these platforms are making money available for the lenders even before it’s collected from the borrowers.

Anytime withdrawal of money by the lenders is possible when one is leveraging one’s own balance sheet or transferring good and bad loans to a new lender. The bad loans are taken care of by ensuring a continuous flow of money from the lenders. What will happen when the inflow slows down and withdrawal goes up? Market watchers say at least one P2P NBFC has sold bad assets worth a few hundred crores to an asset reconstruction company in the recent past.

How can all investors get the same return and instant liquidity when the borrowers are very different from one another and loan rates are not the same for all? What’s happening is some of the P2P platforms are creating a pool of funds to lend. There is no pre-disbursal lender-borrower relationship, the hallmark of this business model.