The troubled waters of RBI's P2P directions

The Peer-to-Peer (P2P) lending sector in India has grown rapidly, with the market expected to reach Rs 7,000 crore by 2025, expanding at a CAGR of over 30%. This growth is driven by increased digital adoption and a demand for alternative financing solutions. P2P platforms connect borrowers directly with lenders, offering faster loan approvals and interest rates ranging from 10% to 30%, often more competitive than traditional banks. The Reserve Bank of India (RBI) regulates over 20 registered P2P platforms, ensuring transparency and investor protection. Despite challenges like a non-performing asset (NPA) rate of around 2-3%, the sector remains a crucial tool for financial inclusion.

The Reserve Bank of India (RBI) has played a pivotal role in shaping the Peer-to-Peer (P2P) lending sector, ensuring stability and transparency in this emerging market. Since 2017, the RBI has mandated registration for P2P platforms as Non-Banking Financial Companies (NBFC-P2P), setting guidelines on capital requirements, fund flow mechanisms, and borrower-lender exposure limits - capped at ₹50 lakh per lender across all platforms. These regulations have enhanced trust among investors and borrowers, curbing potential risks such as fraud and excessive defaults. RBI's proactive measures, including periodic audits and risk assessments, have helped the P2P sector maintain steady growth while balancing innovation with consumer protection.

RBI's Non-Banking Financial Company - Peer to Peer Lending Platform (Reserve Bank) Directions, 2017, monitor the Non-Banking Financial Company (NBFC) Peer-to-Peer (P2P) lending. Section 4(1)(vi) of the Directions defines an NBFC P2P as a non-banking institution that carries on the business of a Peer to Peer Lending Platform. Section 4(1)(iv) defines a participant as a person who has entered into an arrangement with an NBFC-P2P to lend on it or to avail of loan facilitation services.

RBI as a regulatory attempted to lay down these comprehensive guidelines in 2017 for the P2P lending sector to comply with, including registration and eligibility requirements, prudential norms, declaration of dividends, disclosure and transparency, operational guidelines, loan disbursement, fund transfer, and dispute resolution mechanisms. There are separate fair practices codes and participation grievance redressal provisions in those Directions. The Directions carried indicative annexures for compliance.

Over the years, many P2P Lending Platforms misused the guidelines and borrowers have faced issues with their respective platforms. There have been various models of P2P lending, famously one for instant withdrawal and the other to be tenure-based for these participants (small to medium-sized investors).

RBI issued its amendments through updated Master Directions on August 16, 2024. As per the revised directions, a P2P platform is now not allowed to promote P2P lending as an investment product with features like tenure-linked assured minimum returns, providing liquidity options, etc. These guidelines were effective immediately, and operational while writing this article.

In Para 2 of these Directions, RBI clearly states that:

"..........the Directions had laid down clear guidelines regarding various aspects of the functioning of NBFC-P2P Lending Platforms. However, it has been observed that some of these platforms have adopted certain practices which are violative of the said Directions. Such practices include, among others, violation of the prescribed fund's transfer mechanism, promoting peer-to-peer lending as an investment product with features like tenure-linked assured minimum returns, providing liquidity options and at times acting like deposit takers and lenders instead of being a platform. Such violations, when observed, have been dealt with bilaterally by the Reserve Bank of India for remediation."

Much water has flown under the bridge, however, it is better late than never. The New Directions does not allow cross-selling of insurance products, which is like credit enhancement or credit guarantee. No loan should be disbursed unless the lenders and borrowers have been mapped as per the board-approved policy.

There have been various unfair practices by these P2P lending platforms violative of the 2017 guidelines. RBI has taken corrective action by releasing the amendments this year. However, investors demand coercive measures against the platforms that have played with the guidelines and showcased a lack of transparency. The ‘use and misuse' of RBI's guidelines have affected the savings of those investors who have ‘participated' and trusted in the P2P lending platform model and their innovative schemes. Now, some of them can't even withdraw their money due to changes in guidelines, as instant withdrawal is ‘now' not permissible. The customer support of these platforms is not responsive and we wonder what provisions of ‘participant grievance redressal' these platforms implement. Who will face the music, someone has to decide.

India's Peer-to-Peer (P2P) lending regulations by the RBI, while aimed at fostering transparency and protecting investors, have certain limitations. One major flaw is the stringent cap of ₹50 lakh per lender across platforms, which restricts high-net-worth individuals (HNIs) and institutional investors from fully participating, thereby limiting potential capital influx into the sector. Additionally, the lack of a robust mechanism for credit risk assessment exposes lenders to higher default risks, particularly in the absence of a comprehensive credit bureau database for small borrowers.

Reforms are needed to address these issues. Increasing the investment cap for HNIs and institutional investors can boost liquidity, allowing the sector to scale further. Introducing more detailed and mandatory risk assessment frameworks could help platforms better evaluate borrower creditworthiness. The RBI could also facilitate better integration of P2P platforms with credit bureaus to improve transparency in borrower histories. Further, allowing these platforms to offer insurance coverage for loans might protect investors against defaults and build greater confidence in the sector.

The United States offers another example with its robust credit scoring system, enabling better risk assessment and tailored interest rates. India can work towards integrating P2P platforms with comprehensive credit databases to improve credit evaluation.

China's regulatory framework emphasises rigorous monitoring of P2P platforms, focusing on fraud prevention and consumer protection through audits and compliance checks. India could adopt stricter compliance requirements and frequent audits to minimize default risks and enhance platform credibility.

By learning from these models, India could foster a more balanced P2P lending ecosystem, blending growth with investor and borrower protection.

'Ritwik Mehta is a political strategist and Founder of Niti Tantra
'' Aditya Trivedi is Advocate, Delhi High Court and CCI