The Evolution of P2P Lending in India: Regulation Before and After
The world has witnessed the emergence of several technologies over the years that have successfully challenged accepted norms. At the turn of the century, a fusion of finance and technology led to the fintech revolution. It has changed the way we manage our finances and do banking, challenging the traditional methods of the existing financial infrastructure.
The relatively new concept of online P2P lending or Peer to Peer lending in India has revolutionized lending. P2P lending is a monetary arrangement between two individuals without the intervention of any intermediary, thus eliminating the margins made by financial institutions. Lenders looking to earn higher returns from their excess funds lend to borrowers seeking low cost and fast unsecured personal, business or educational loans online through the P2P lending platform.
P2P lending platforms act as a facilitator and mitigate risk by providing facilities such as onboarding, credit reporting, signing agreements, loan disbursement, collection and collection. Moreover, compared to traditional credit institutions, P2P is fast, contactless, paperless and flexible.
P2P platforms before regulation
I have always believed that financial services that affect the lives of millions of people should follow a certain structure that protects the interests of all stakeholders. Since 2013, I understood the need for regulation in the P2P lending industry and continued to push for the same.
In the early years, the sector experienced substantial growth in the number of platforms, rising from 2 to 40 in three years. Its growth in India was supported by an ecosystem that helped P2P lending flourish – on the supply side, the Indian stack, payment gateways made online transactions safe and popular while on the demand, P2P loans were helping bridge the huge credit gap and helping small businesses access credit. Thus, IIt was pertinent that the sector be regulated to ensure fair practices so that it could thrive without causing repercussions.
The need to enforce regulation in the P2P sector was well reflected in what happened in China. The rampant rise of P2P platforms had seen thousands of companies operating simultaneously in the country. However, the inability to control the rise of the platforms has led to the complete collapse of the industry as investors lost their money and borrowers feared to repay loans. To this extent, the Reserve Bank of India has been proactive and prompt in introducing regulatory guidelines for the sector in India.
Recognizing the importance of the sector, the RBI in October 2017 officially recognized P2P lending in India as NBFC-P2P. The regulations were comprehensive and covered various aspects such as authorized activity, prudential capital regulations, governance, fund transfer mechanism, data security, business continuity plan (BCP), regulatory reporting and other operational parameters.
The regulation has been welcomed with open arms by P2P platforms. They sort of separated the wheat from the chaff because there were only a handful of solid players left in the regulation of market positions.
The inclusion of the sector under a regulatory framework has brought more transparency, stability and credibility to P2P lending. This has increased its potential to compete with traditional asset classes such as mutual funds and stocks, attracting lenders and freeing up supply. Additionally, there was now a lot more awareness about P2P platforms in the market, which helped attract more borrowers interested in fast, low-cost loans.
Being in a regularized sector, P2P platforms could also now enter into tie-ups and partnerships. Regulations meant more acceptability and therefore more seamless integration with partners on both the demand and supply side. These partnerships have extended to all aspects of the business, making systems more robust. For example, at Faircent, we were the first to launch an open API platform in the industry, which enabled fintech platforms and offline businesses to take advantage of the platform’s extensive and robust technology infrastructure. -shape to create new digital lending products and integrate existing solutions into their offerings.
Also, as registered NBFCs, P2P platforms could access data and report defaults to credit bureaus, allowing them to increase the pool of potential borrowers to include the right kind of borrowers. The regulations provided much-needed structure to the industry and established a level playing field for all financial institutions in the lending industry.
The investor interest that the sector has generated in the recent past testifies to its importance. The importance of P2P lending was further highlighted during the full lockdown, when traditional financial institutions were unable to lend. During COVID – first and second wave – Faircent has disbursed over INR 1100 crore to over 8 lacs small businesses and individuals, through our fully online and contactless process.
The future of the P2P lending industry in India is bright. With a *CAGR of 21.6%, the P2P lending market is expected to reach $10.5 billion by 2026. Growing transparency with technologies is one of the few factors driving the growth of the industry. At the same time, the Indian government’s promotion of cashless technologies and the creation of more financially inclusive financial structures are adding to the growth momentum. Lifting the regulatory cap on investments by lenders and providing tax benefits will be another step in the right direction to encourage the unique P2P lending model that can help the government achieve its goal of financial inclusion by facilitating access to credit for MSMEs. It’s never been more critical than it is now
The opinions expressed above are those of the author.
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