- Apprentice Lawyer
By Harini Subramani
The Reserve Bank of India’s notification on peer to peer (P2P) lending issued on October 4 this year (“Regulations”) seems to have only added an element of ambiguity in the minds of stakeholders. Eighteen months since the RBI issued the consultation paper and it is not certain how and whether stakeholder comments have been internalised in the paper.
In fact, a few concerns were discussed in a recent call organised by the Digital Lenders Association of India (DLAI) involving stakeholders. Primary among these include the scope of these Regulations, who exactly it aims to cover and the commercial feasibility considering the prudential norms the RBI has envisaged.
The definition of a “peer to peer lending platform” as an intermediary providing the services of loan facilitation, may unintentionally bring into the purview, a wide variety of operators. As a literal construct, this does not seem to take into cognizance the various types of business operations in the industry simply because it doesn’t clarify whether this excludes a model that doesn’t provide syndication. Theoretically even an internet search engine, business correspondents and lead generators could fall under this definition. The definition offers a macro thought; perhaps the RBI would refine this over a period of time but in the interim, this may be unsettling for entities. Granted that regulating P2P functions may have been necessary, but should regulation of innovations have a retrospective effect?
This must be the first category of Non-Banking Financial Company (NBFC) to not function in the manner in which it has been typically designed. The new Regulations set a precedent to regulate entities as NBFC’s that undertake neither lending nor credit enhancement. The RBI, for reasons unknown, offers no rationale for this. Remember, even in the words of the RBI, such P2P NBFC’s would make a profit from arrangement fees and not from the spread between lending and deposit rates as is the case with normal financial intermediation.
This also bring us to the point of viability from the perspective of a start-up. The reasons that contribute to the burden of costs given the current new Regulations include the significant documentation process considering the ticket size, and exposure levels to a single borrower. While the Regulations are silent on the authority that would monitor the prudential norms, a back-of-the-envelope calculation indicates high operating expenditures and few options for scalability thereby immediately accelerating the business risks.
The new Regulations also seem to bring into its ambit, an “off-line” P2P: the very essence for P2P start-ups has been low transaction costs thereby resorting to the online medium for such lending. So what exactly does the RBI mean when it defines a peer to peer lending platform as an intermediary providing services via online medium “or otherwise”? How lucrative would that option even be? The viability of an NBFC is a function of its risk appetite, its risk profiling, and its spread which is presumed to increase over a period of time because of its access to low cost access. Unless there is some kind of packaging (read innovative model) by lenders, for example, this could even probably lead to some kind of lobbying.
A last thought on the reach that the RBI is trying to focus on: If you remember, the RBI consultation paper issued in April last year said that P2P lending “promotes alternative forms of finance, where formal finance is unable to reach”. Going by the Regulations now in place, it would seem that the emphasis may be tilting towards micro-finance.
I am reminded of this tamil proverb which goes like this: “ஆழம் தெரியாமல் காலை இட்டுக்கொண்டதுபோல” (transliteration: Āḻam teriyāmal kālai iṭṭukkoṇṭatupōla) Loosely translated this means “stepping into the water without knowing its depth.” Start-ups may not find this lucrative, and existing NBFC’s operating here if at all would have to route it through another entity, then who are we regulating here..
Harini Subramani is an independent advocate. The views expressed here are her own.