The central bank has said peer-to-peer lending platforms cannot offer any default loss guarantee (DLG) to investors, as it furthers scrutiny on the digital lending sector.
The Reserve Bank of India’s directive dated April 26 is likely to impact operations of P2P platforms that relied on affiliates such as Uni, MobiKwik, BharatPe, Rupifi and others to source customers, industry executives said. Some prominent P2P startups with a strong affiliate business are Lendbox, LiquiLoans, Faircent and LendenClub.
Typically, when an unregulated company enters into an arrangement with a lender to source credit for its customers, it is permitted to offer a small guarantee on the capital deployed. RBI permits DLG against such loans, allowing losses of up to 5% of total defaults to be covered by the company.
“DLG is not permitted on loans arranged on NBFC-P2P platforms,” the regulator said in an FAQ document.
Higher Customer Acquisition Cost
Experts are of the view that the regulator’s action will help improve governance in digital lending, but may also increase customer acquisition cost for P2P platforms. “For P2P startups, the cost of acquiring both lenders and borrowers is very high. Now, they will either have to redraw their partnership arrangements or switch to open market sourcing,” said a founder of a fintech lending startup.
Pointing out that P2P lending platforms only connect (retail) borrowers with lenders, Rishabh Mastaram, founder of RGM Legal said, “Ideally, they (P2P platforms) should never enter into DLG arrangements. However, in the absence of clear instructions, many platforms were doing this, but now all that will have to stop.”
In March, P2P lending platforms collectively decided to stop offering liquid investment options to its customers, following RBI’s disapproval. Now, the regulator disallowing DLG could have further impact. “In the absence of DLG, the real risks of P2P lending might discourage many investors looking to diversify their investments from investing through the platforms,” said the founder cited earlier.
Treading Cautiously
The P2P lending industry has been under regulatory scrutiny in recent months and some of the companies have already taken preventive action. “Many of us had stopped this last year itself, when RBI was scrutinising our business. Some were still doing it but now that will stop too,” said the founder of a P2P lending startup on the condition of anonymity.
Another P2P startup founder said that during the boom of 2021-22, when demand for credit was extremely high, consumer-facing platforms were offering first loss default guarantee (FLDG) as high as 40-50% in lieu of partnerships with P2P lenders who would bring in investors to lend to these customers.
Over the past year, the central bank has cracked down on most of these partnerships, drawing a line for unchecked and unsecured consumer credit growth in the economy.
