RBI to regulate peer-to-peer lending firms

Economic Affairs Financial Markets

According to a recently released notification of government , All peer-to-peer lending (P2P) platforms will be regulated by the Reserve Bank of India (RBI).
All P2P loan platforms will be treated as non-banking financial companies (NBFCs) and will be brought under the ambit of the banking regulator.

What is P2P lending?

P2P lending is a crowd-funding model (largely online) where people looking to invest their money with people who want to borrow can do so. The concept is centered around savers getting higher interest by lending their money instead of saving and borrowers get comparatively lower interest rates.
Borrowers are either individuals or small businesses. But unlike a traditional savings account, one can lose money if the borrower defaults.
Operation model in India
P2P lending platforms are largely tech companies registered under the Companies Act. Once the borrowers and lenders register themselves on the website, due diligence is carried out by the platform and those found acceptable are allowed to participate in lending/borrowing activity.
The companies often follow a reverse auction model in which the lenders bid for a borrower’s loan proposal and the borrower has the freedom to either accept or reject the offer.
Some platforms provide several additional services like credit assessment, recovery etc. In most cases, the platform moderates the interaction between the borrower and the lender.

Analysis:

Till April 2016, there were around 30 start-up P2P lending companies in India. Although nascent in India and not significant in value yet, the potential benefits that P2P lending promises to various stakeholders (to the borrowers, lenders, agencies etc.) and its associated risks to the financial system are too important to be ignored, according to RBI.
Global cumulative lending through P2P platforms at the end of Q4 of 2015, had reached 4.4 billion GBP (approximately Rs 38,300 crore) from 2.2 million GBP (about Rs 19 crore) in 2012.
At present, it is partially or fully regulated in Australia, Argentina, Canada (Ontario), New Zealand, United Kingdom, France, Germany, Italy and USA while it is banned in Israel and Japan. China has the largest P2P market in the world, with hundreds of platforms offering diverse services, but the sector is not regulated currently.

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