By Linda George, IFMR Finance Foundation
Recently the Reserve Bank of India released a Consultation Paper on Peer to Peer Lending aimed at defining the contours of regulating Peer to Peer (P2P) Lending in India. The below table lays out our responses to some of the themes that are covered in the paper.
|Theme||Potential risks||Mitigatory steps considered by RBI||Responses and Comments|
|Systemic Risks, risk of contagion||Currently, platforms do not create any threat of systemic risk. There are chances that the platforms will grow into being systemically important.||Considering these entities as NBFCs.
Applying a leverage ratio if needed.
|If the Platform is not to take any credit exposure to its borrowers (through guarantees), or co-lend along with its lenders, it will therefore be a pure marketplace, and would therefore not be holding any credit risk on its balance sheet. In this regard, the approach taken by UK’s Financial Conduct Authority (FCA) is worth exploring. Prudential Standards are being based on the total value of the firm’s loaned funds outstanding instead of the total amount of cumulative loans that the firm may have provided during the lifetime. The volume-based financial resources requirement calibration is provided in Annex.|
|Information Disclosures||Lack of information and/or other signals about the performance of the platforms will make it hard for participants as well as regulators to gauge their performance, quality of underwriting and size.||Submission of regular reports to RBI.||Detailed reporting requirements should be established which includes book size, default statistics, returns performance, and complaints and their resolution, at the minimum.
UK Peer to Peer Finance Association reporting requirements can be emulated (these include disclosures on cumulative lending, outstanding loan book, net lending, number of lenders and borrowers and so on).
|Quality of Underwriting, Suitability Assessments||When the problem of information asymmetry exists, the understanding of the lender with respect to the risk involved in the activity of lending would need to be robust, and therefore, platforms’ ability to assess the credit risk involved and its implications to the lender would be important.||RBI has left this to the markets to decide.||P2P Platforms must be required to uphold RBI’s Charter of Customer Rights, just as other credit providers are, and within this they should therefore be required to undertake borrower debt servicing capability analysis before they get connected to lenders. Similarly, the platform must undertake an assessment to ensure that the unsophisticated lender (akin to a debt investor) is entering into a contract that is suitable for him/her financial conditions, needs and goals.
UK’s FCA is considering the introduction of rules of suitability of advice, which will make it an obligation for the firms to make sure the recommendations are suitable for the clients.
P2P platforms can be provided access to credit bureau reports on their borrowers provided the Credit Information Companies Regulations 2005 is suitably amended as required and robust data sharing guidelines are followed.
|Customer protection concerns for borrowers||Fair treatment of the borrower, strong-arm tactics being used etc. Lack of information to the borrower about the redressal mechanism.||RBI’s NBFC Fair Practice Code is to be applicable.||This is a welcome move, and it would ensure that both lenders and borrowers have access to clear grievance redressal processes. However, the Fair Practice Code itself needs to be evolved into a Code for all formal credit providers such that it can take into account new types of intermediaries like P2P platforms.|
|Customer protection concerns for unsophisticated lenders||When individual lenders get involved, there is a concern that they may not be fully aware of risks involved.
Unclear processes could lead to opacity, with the lenders being misled about defaulting borrowers.
|Not considered||Individual unsophisticated lenders should have sufficient information to make informed decisions about whether or not to participate on the P2P Platform.
This includes obligations towards the lenders to inform them about delinquencies if any in a timely manner, and have a clear process in place regarding delinquency management that is disclosed to lenders.
|Risk of exclusion||Discrimination based on race, caste, or gender, might arise which will lead to the exclusion of certain customers from getting correctly priced credit.||Not considered||It becomes very necessary from a regulatory point of view to ensure that these forms of discrimination do not exist in the system. This is however a problem that exists with all other forms of lending, and could get compounded by the fact that the regulator has limited information on underwriting methodologies.|
|Privacy and data security risk||Privacy and data protection concerns with respect to personal and sensitive information of lenders and borrowers.||RBI places this responsibility on the platform.||The platform needs to take steps to adhere to all existing data privacy norms, as well as comply with the Right to Privacy covered by the RBI Charter of Customer Rights.|
|Unsecured lending||Usurious and unfair practices may get adopted by P2P platforms if secured lending is to be allowed.||RBI clarifies that P2P platforms will engage in only unsecured lending.||It is unclear why this requirement is necessary as, as long as existing norms are not violated, and customer protection requirements are met, if furnishing security can bring down costs of borrowing, it must be permitted.|
Regulating peer to peer lending platforms is necessary, as justified in the Consultation Paper, and it will enable a more trust-worthy environment for both lenders and borrowers. Intervention of the regulatory authorities should be focused towards creating a level playing field for P2P platforms among all other market players to ensure better competition and more efficient allocation of resources across the system.
In the context of UK, the volume- based financial resources requirement calibration placed by FCA on P2P platforms is the sum of:
- 0.2% of the first £50 million of the total value of the total loaned funds outstanding
- 0.15% of the next £200 million of the total value of the total loaned funds outstanding
- 0.1% of the next £250 million of the total value of the total loaned funds outstanding
- 0.05% of any remaining balance of the total value of the total loaned funds outstanding above £500m