P2P platforms taking on the lender role led RBI to read the riot act

MUMBAI: The Reserve Bank of India's (RBI) tightening of norms for P2P lenders comes after several of them were found to be having hundreds of crores of rupees in escrow accounts in violation of guidelines for the platform providers, said people familiar with the matter.

Many of the lenders were interpreting the regulations liberally to suit their lending practices, forcing the regulator to come up with norms that clearly state that they can't assume the role of lending institutions, said those people familiar with the matter.

"P2P lenders were supposed to be just a platform, but they had taken up the role of lenders," said one of the persons familiar with the developments. "They were taking funds and keeping the funds with them, which is not permitted."


Last week, the central bank issued a revised master circular on regulations for P2P lenders. It included barring them from credit enhancement, assuring guaranteed returns and prohibiting them from selling insurance products. It also said that the T+1 transactions mandate must be adhered to.

An RBI spokesman did not reply to queries seeking comments on whether P2P operators were keeping funds in violation of the regulatory guidelines.

"Some P2P lenders were acting as deposit-taking NBFCs, and this could have been avoided," said the founder of such a platform. "P2P platforms that were operating on that model are now being upfront, they have been reaching out to customers and communicating if there is a revision in tenure, rates or the processing of the loan," he said.

The industry is estimated to be about ?20,000 crore of assets with about half a dozen companies accounting for more than three-fourths of the total assets. There are 26 NBFCs-P2P registered with the RBI as of March 31, 2024. The P2P platform connects individual lenders with borrowers to facilitate unsecured loans.

"These funds are supposed to be kept in trust and that too just for a day, and the money has to just flow through the platform operator and not sit there," said another person.

"The funds transferred into the lenders' escrow account and borrowers' escrow account shall not remain in these escrow accounts for a period exceeding 'T+1' day, where 'T' is the date on which the funds are received in these escrow accounts," said the guidelines released last week.

One of the reasons for the regulator to mandate this is that some of the platform operators were found to be taking deposits like a non-banking finance company promising high interest rates and lending to a borrower at a later date.

The industry sources said it would increase the risk of the depositor losing his money in the case of the platform going bust and conducting itself like an NBFC.

"While this placed the operators on a par with the NBFC, but without the stringent regulations and the capital norms that other lenders have to adhere to," said an executive in an NBFC who did not want to be identified.

The central bank does not want a situation where the depositor with the P2P ends up losing money without knowing the risk of doing business with such a platform.

"NBFC-P2P shall be required to obtain an explicit declaration from the lender stating that he/she has understood all the risks associated with the lending transactions and that the P2P platform does not assure return of principal/payment of interest," the RBI said. "The declaration shall also state that there exists a likelihood of loss of entire principal in case of default by a borrower."