Here's why P2P lending platforms are struggling to adapt to new RBI regulations

It’s been more than a month since the Reserve Bank of India’s (RBI) new regulations on peer-to-peer (P2P) lending took effect, but the industry is still struggling to adjust. Several platforms have experienced a sharp decline in their business, with some even seeing volumes drop by 90%.

“Since the new regulations came into force, our volumes have dropped by 90%. We’ve resumed accepting new investments, but a new product we’ve introduced is not drawing lenders,” says Bhuvan Rustagi, Co-founder and COO of LendBox, a major P2P lending platform.

The P2P lending model allows individuals to provide loans to others through RBI-regulated NBFC (non-banking financial company) platforms that connect lenders with borrowers. These platforms serve as intermediaries, facilitating transactions and overseeing repayments.

Due to falling volumes, some P2P platforms are even contemplating the possibility of ceasing their operations. “The cost of transactions has increased manifold. Earlier, we could process lump sum transactions at maturity, but now we need to complete multiple transactions, as funds must be disbursed for each borrower on a T+1 basis, leading to increased operational costs. As a result, this business model is no longer viable,” says the founder of a leading P2P platform, requesting anonymity.

“The cost of transferring funds, which will be borne by the borrower, will raise the borrowing cost of the loan amount. This will result in a higher APR (annual percentage rate), making borrowing rates less competitive within the industry,” adds another P2P lending platform founder. APR represents the total cost of borrowing, including interest and other hidden fees.

The expenses associated with operating for P2P players have increased due to RBI’s revised guidelines issued on August 16, 2024. The new regulations mandate that funds in the escrow accounts of lenders and borrowers must be transferred within one business day (T+1), severely affecting the P2P lending model.

“Now multiple deposits are required to be made in a lender’s account, which has increased cost. Moreover, it has become difficult for lenders to manually select borrowers within the T+1 timeframe if they wish to reinvest,” says a P2P founder who wished to remain anonymous.

The new rules also prohibit lenders from engaging in lender-to-lender transactions. This means money can only move between respective lender and borrower accounts. Consequently, loans offered through the secondary market have stopped, eliminating liquidity and pre-maturity withdrawal options. According to RBI’s circular, “Funds from lenders’ bank accounts shall only be transferred to the lenders’ escrow account and then disbursed to the specific borrower’s bank account, ensuring compliance with paragraph 8(3) of these directions. The borrower shall repay the loan from their bank account to the borrowers’ escrow account, from which funds will be transferred to the respective lender’s bank account.”

An escrow account is a neutral holding account where funds are kept until the final transaction. In P2P lending, once a lender decides to fund a loan, they transfer the amount into the lender’s escrow account, from which it is disbursed to the borrower’s bank account. The same process is followed for repayments from the borrower.

Following the introduction of these guidelines, RBI imposed penalties on August 23, 2024, on several P2P lending platforms for violating its rules. Innofin Solutions Private Ltd, also known as LenDenClub, faced a penalty of Rs 1.99 crore, while NDX P2P Private Ltd, also known as LiquiLoans, was fined Rs 1.92 crore. The penalties were imposed following a scrutiny conducted by RBI in June 2023, which revealed breaches of the ‘Non-Banking Financial Company - Peer to Peer Lending Platform Directions, 2017’ and the ‘Guidelines on Digital Lending’ by these firms.

Despite these challenges, the industry remains optimistic. For instance, IndiaP2P, which is launching a new product aligning with the new RBI regulations. “[We] are introducing the Monthly Income Plan Plus product in line with new, faster settlement requirements,” says Neha Juneja, CEO of IndiaP2P.

@teena_kaushal