RBI Cautious Of First Loan Default Guarantee Cover By P2P Lending Companies

The RBI seems to be averse to the idea of P2P lending platforms offering a first loan default guarantee (FLDG) to institutional lenders, according to sources. This comes at a time when the central banking institution is gearing up to release the official guidelines for peer-to-peer lending in India by July 2017.

The FLDG is the way micro-finance institutions and NBFCs in India protect the lender’s interest, especially in cases of default. Under the FLDG security cover, lenders can ask for collaterals as a way of safeguarding their money.

To mitigate the risk of loan delinquency, the RBI released a fresh list of guidelines last year, as part of a consultation paper of P2P lending. It stated, “The platforms will be prohibited from giving any assured return either directly or indirectly. The platform will be allowed to opine on the suitability of the lender and credit worthiness of a borrower.”

Once the RBI norms are instituted, peer-to-peer lending platforms will be allowed to serve only as intermediaries offering matchmaking services for borrowers and lenders.

What Is P2P Lending

Peer-to-peer (P2P) lending is a type of debt financing that allows individuals as well as businesses to borrow money online, without having to rely on an official financial institution as an intermediary. At present, P2P lending is handled by specialised online platforms that match lenders with borrowers based on their needs and demands.

It conducts background checks and due diligence on borrowers and lenders, including verification of bank account, employment status and income. To prevent loan defaults, the companies use the database of credit bureaus to perform credit assessment, and determine borrower’s creditworthiness.

As per a 2016 report released by accountancy firm KPMG and the Cambridge Centre for Alternative Finance, the global peer-to-peer lending market is worth $130 Bn.

India’s Fast-Growing P2P Lending Market 

In India, the P2P online lending industry is undergoing rapid growth in recent times. As per reports by My Big Plunge, it is poised to expand into a $4 Bn- $5 Bn empire by 2023. Current players in this segment include more than 30 players. This includes the likes of Faircent, Lendbox, LendenClub, I-Lend, Capital Float, Indifi, IndiaMoneyMart, Monexo, Rupaiya Exchange, Capzest and many more.

To accelerate the growth process, several P2P lending companies have enlisted the help of institutional lenders looking for high returns on investments. Commenting on the latest development, Lenden Club co-founder Bhavin Patel told ET, “There are few platforms which are offering FLDG covers to various institutions. We have already partnered with two NBFCs without any FLDG cover as they are interested in low-cost sourcing of borrowers through us.”

The absence of regulations, however, inadvertently increases the risk involved in such activities. Because the industry is still at a nascent stage, lack of proper credit infrastructure and insurance only accentuates the problem.

Speaking about the impact RBI’s regulations will have on the industry, CEO of Monexo, Mukesh Bubna said in an exclusive interview with Inc42: “The RBI guidelines will be an important moment for the P2P sector in India. A clear set of rules and expectations from the regulator will provide much needed clarity, set industry standards and provide further confidence to investors. From the draft consultation paper, it is expected that the RBI will play the role of a vigilant regulator focused on ensuring that platforms pursue prudent risk management practices, be transparent about credit performance and have in place a viable business continuity plan.”

If the RBI decides to prevent P2P lending companies from a offering first loan default guarantee (FLDG) cover, they may suffer without the backing of institutional investors. How far the industry/players will manage to maintain its streak of gold in the digital economy remains to be seen.

(The development was reported by ET)