Important news for P2P lending

Via, Neil Borate@ActusDei


India's P2P lending industry is on the tenterhooks. It may have to STOP redemptions this week unless it can get RBI relief. Let me explain why.

First, a primer on P2P lending. Concept is simple. A platform (licensed as a P2P NBFC by RBI) matches lenders and borrowers (both ordinary people). Max lender exposure is 50 lakh per lender - keeps out the big money. But people don't like the hassle of selecting borrowers. So the platforms came up with some creative interpretations of the rules.

What are these?

1)  'Secondary market' in loans. If I place a redemption order, the algo 'sells' my loan to another guy. All in the background - needs no manual intervention by me or the other guy. RBI has banned this. This was how they gave 'instant liquidity' after a 3 month lock-in.

2) Using the spread between lending and borrowing to absorb losses. Very similar to a bank. Not permitted. Now any loss must be borne by the actual lender.

3) Tie ups with fintechs so that money only goes to their users (think of Cred and Bharatpe and the 9% and 12% clubs). The P2P NBFC just acts as a 'router'. Not allowed.

4) Assuring return. FLDG (First Loss Default Guarantee) from fintechs. Both were anyway banned.

5) T+1 settlement of each repayment. The money must go from the lender's account to escrow and then to borrower and vice versa. The P2P platform can't allow you to 'check box' and just redeploy the maturing repayments to new borrowers. Imagine the cost and hassle of paying out 10 rupee EMIs every day! T+1 kicks in after 90 days.

Put together these reforms mean the end of P2P in India. The industry is desperately knocking at RBI's doors get some relief.

But why might withdrawals stop? You see to comply with the circular, the P2P NBFC cannot shuffle your loans anymore to other lenders on the platform. So your exit only comes when the loans in your portfolio mature.

The circular is silent on grandfathering and went into effect immediately on Friday, after market hours. Either the P2P guys honor redemptions this week and violate the circular or they stop redemptions.

This sorry state of affairs is a result of RBI's inertia for the past 4 yrs. It allowed the industry to grow. About 10-15 lakh small investors and 10k crore in disbursals have happened. P2Ps argued that RBI knew ever inspected them regularly and allowed their operations to continue. Hence it was all legit. Now it is not. I repeat.
@RBI
, what were you doing for the past 4 years?

If you want some background on P2P, read my earlier story on the largest P2P player Liquiloans
https://www.livemint.com/money/the-people-s-bank-that-liquiloans-has-built-11718258584707.html