How India Is Building A Strong P2P Lending Framework?

Aug 18, 2020

One of the ways Indian fintech continues to make a significant impact on the world of finance is to enable fintech-based lending. No more into the nascent stage, P2P lending is displaying signs of future potential in India. There is no doubt that these forms of lending transactions are the most remarkable development of the decade.

Guidelines And Regulations

With the country boasting a wide mobile phone user base of around 1.190 billion in 2019 (up 2.8% year-on-year) along with an increased focus on financial inclusion, P2P lending has brought about the possibility of a major disruption in the way people avail credit and the role of banks and financial institutions in this. With the RBI coming out with the P2P Master Directions in October 2017, the industry has a formally recognized legal framework, and no longer needs to operate in a regulatory grey area. There is now a definite set of guidelines and regulations that govern this industry.

In order to modify the financial landscape, the then government took measures. In 1982 Prof. Sukhamoy Chakravarty Committee formed by the RBI-Governor (India’s ex-PM)
Dr Manmohan Singh implemented regulatory changes that formally linked the banking sector, non-banking financial institutions, and the unorganized sector to evaluate India’s monetary system from a larger perspective.

Broaden The Horizons

Accounting for a substantial percentage of the population, this segment has been driving the economy substantially. After the 2008 economic crisis and the more recent NBFC crisis jolting the Indian markets, the RBI started looking for alternatives. P2P lending platforms showed great promise, mainly due to perceived low-interest rates, simplified application, and disbursal process along with quick lending decisions.

The government’s focus on developing P2P was further underlined by its announcement wherein the apex bank increased P2P loan disbursal limit to Rs. 50 lakh from Rs. 10 lakh. This is a rare joy in a segment, which has been heavily monitored and restricted until now. Considering many start-ups are emerging in this domain, the 5X lending-cap extension will give them relief and attract the attention of venture capitalists.

The RBI has advised all P2P operators to appoint a trustee to monitor the flow of funds between escrow accounts of borrowers and lenders. The RBI guidelines specify that this trustee has to be a bank-promoted one to maintain adequate monitoring of the platform through the trustee.

Growing at a high pace

In India, the P2P business seems to be riding on the growth of retail and MSME lending, which is ignored by both banks and non-banking financial companies. The sector was a hot cake and money generation machine for private money lenders, who are mainly informal lenders. On a lending side, it can replace this informal lending by RBI specified entity. On an investment side, P2P will get firmly established as a new age investment option, competing with other market-linked options such as MFs and stocks.

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