CashNews.co
The Reserve Bank of India’s (RBI) recent guidelines on Peer-to-Peer (P2P) lending platforms have brought the industry to a standstill. These rules introduced several immediate changes, forcing many P2P platforms to overhaul their systems to comply.
P2P platforms allow individuals to lend money directly to others through RBI-regulated non-banking financial companies (NBFCs) that operate as intermediaries. These platforms match lenders with borrowers and manage the transactions, charging a fee of 1–3% for their services.
“We’re not taking on any new business right now. Everything is on hold because we need to update our systems to meet the new RBI requirements,” said a P2P platform operator who requested anonymity.
Here is how the P2P industry has changed, after the RBI released new guidelines on August 16, 2024.
Tighter Control on Escrow Accounts
The RBI has introduced a new regulation that requires funds in Lenders’ and Borrowers’ Escrow Accounts to be transferred within one business day (T+1) of being received. This change has significantly impacted the P2P lending industry. According to a P2P player who spoke on the condition of anonymity said repayments are now required to be paid to lenders monthly, without the option to reinvest funds as they mature.
An escrow account is a neutral holding account where funds are kept until the final transaction. In the context of P2P lending, once a lender decides to fund a loan, they transfer the desired amount into the lenders escrow account. The funds are then disbursed directly to the borrower’s bank account, ensuring that the money is securely handled according to the agreement. Similar process is followed when borrower repays the money.
To participate in P2P lending, both borrowers and lenders must first register by filling out an online form, submitting know-your-customer (KYC) documents, and providing a bank account statement. This process ensures that all parties are verified, and the transactions are conducted smoothly and securely by transferring money into respective escrow accounts.
Restrictions on Liquidity and Early Withdrawals
The new guidelines prohibit P2P platforms from offering early withdrawal options. All fund transfers must now occur solely through escrow accounts, with lender-to-lender transactions banned. Previously, platforms could offer liquidity by allowing one lender to purchase another lender’s loan when early redemption was requested.
The RBI’s notice prohibits lender-to-lender transactions, stating that money should move between respective lender and borrower accounts: “Funds from lenders’ bank accounts shall only be transferred to the Lenders’ Escrow Account and then disbursed to the specific borrower’s bank account, ensuring compliance with paragraph 8(3) of these Directions. The borrower shall repay the loan from their bank account to the Borrowers’ Escrow Account, from which funds will be transferred to the respective lender’s bank account.
Manual Selection of Borrowers
Lenders must now manually select their borrowers, a process previously handled by algorithms that could diversify a lender’s portfolio across hundreds or even thousands of borrowers. “Earlier, we could spread a lender’s Rs50 investment across numerous borrowers, but with manual selection, it’s now limited to just 10-15 borrowers,” the platform operator explained.
Many platforms had relied on advanced AI and machine learning to efficiently match lenders with borrowers, allowing them to minimize risk by spreading investments as small as Rs1 across many loans.
The RBI emphasized in its notice that “No loan shall be disbursed unless the lenders and the borrowers have been matched/mapped as per the board-approved policy… the individual lender(s) have approved the individual recipient(s) of the loan, and all concerned participants have signed the loan contract.”
These changes have significantly disrupted the P2P lending industry, causing many platforms to halt operations until they can fully comply with the new rules.