RBI Tightens Regulations for P2P Lending Platforms

In a significant regulatory move, the Reserve Bank of India (RBI) has issued revised guidelines for Non-Banking Financial Company – Peer to Peer Lending Platforms (NBFC-P2P Lending Platforms), marking a shift aimed at reinforcing transparency, compliance, and protecting stakeholders in the P2P lending ecosystem on August 16, 2024.

The changes came in response to observed violations of the existing Master Direction issued on October 04, 2017 (“2017 Directions”), which governs the operations of NBFC-P2P platforms. The 2017 Directions positioned NBFC-P2P platforms as intermediaries providing an online marketplace for lenders and borrowers. However, the RBI observed that some platforms had strayed from their prescribed roles, engaging in practices such as promoting P2P lending as an investment product with assured returns, offering liquidity options, and at times, acting like deposit-takers and lenders.

These practices violated the essence of the 2017 Directions, leading to the need for the newly amended directions.

A crucial change involves the fund transfer mechanism. The revised directions mandate the use of escrow accounts operated by bank-promoted trustees for all fund transfers between lenders and borrowers. Specifically, funds from lenders must be transferred to a Lenders’ Escrow Account and only disbursed to borrowers upon compliance. Likewise, repayments by borrowers will flow into a Borrowers’ Escrow Account and be promptly transferred to lenders, with a strict T+1 timeline for fund deployment.

Further tightening the operations, the RBI now requires that no loan be disbursed unless the lenders and borrowers have been matched and mapped as per a board-approved policy. The directions also impose stringent disclosure requirements on P2P platforms, including publicly disclosing portfolio performance, non-performing assets (NPAs), and losses borne by lenders. This transparency is intended to provide lenders with a clearer understanding of the risks involved in P2P lending.

These revised directions shall come into effect immediately, except for the timeline for fund deployment which shall be effective from ninety days of the date of the circular.

The prohibition against treating P2P lending as an investment product, along with the stricter fund transfer mechanism, could challenge the operational models of many existing platforms. Moreover, the new restrictions on credit enhancements and the requirement for transparency may lead to a more cautious approach among retail investors, potentially affecting the growth trajectory of the sector.