Is RBI over-regulating by allotting online platforms additional responsibilities?

In its consultation paper issued in April, Reserve Bank of India (RBI) had listed points to develop a regulation for peer-to-peer lending (P2P), a form of crowdfunding to raise loans to be repaid with interest (other forms of crowdfunding like equity and debt-based crowdfunding are proposed to be the subject matter of the Securities and Exchange Board of India (SEBI)).

The RBI proposes to define P2P platforms as non-banking financial companies (NBFCs) and provides for prudential requirements (a minimum capital of Rs 2 crore), leaving open the possibility of introducing leverage ratios in order to curb platforms from “expanding with indiscriminate leverage”.

The RBI noted the following key features (or responsibilities) of P2P platforms:

• Assisting in loan repayments including hiring recovery agents, if need be;
• Preliminary assessment of credit worthiness;
• Credit scoring;
• Conducting due diligence of lenders or borrowers; and
• Facilitation of the documentation.

The role of a P2P

a) Can a P2P be an NBFC?

To consider P2P under the ambit of NBFCs appears ludicrous for the main reason that the function of NBFCs is much wider in scope involving functions of deposit taking etc., while a P2P platform primarily plays an enabling role. The features outlined above that a P2P must necessarily be responsible for ‘uncomfortably’ mirror those of traditional brick-and-mortar banks, although not in the entirety of the spirit of the latter. The question that looms large is: why burden a platform that is only bringing together lenders and borrowers? Why shift the caveat emptor (‘let the buyer beware’, a common legal principle where the responsibility of the purchase is typically of the buyer) principle on to the platform from the borrower? After all, is it fair to penalise a marriage registration portal for the failure of a marriage between the bride and the groom?

b) What assured returns?

The RBI has also said that the platform will be prohibited from providing any assured return directly or indirectly. This appears to be a vague statement for two reasons. One, by assuming the role of facilitators, the P2P platforms would provide only an implied assurance of quality. Two, there would be no exchange of money with the platform as funds will have to necessarily travel directly from the lender’s bank account to the borrower’s bank account; and hence there is no possibility of an assured return.

c) Expansion

The paper also uses the term ‘expansion’. This is rather vague for a P2P online platform. Thus, it would be better for the RBI to clarify as to what it encompasses. It is not clear as to what indiscriminate leverage it refers to.

Single or multi-regulation

In its paper, the SEBI angle has not been probed. Sample this: considering the process involves loans, non-performing assets and equity conversions/securities could be necessary evils. Further, P2P lending may also facilitate a backdoor entry to unregulated offshore funds outside of the foreign portfolio investors regulations. All these products and areas are very clearly the territory of SEBI. Therefore, should SEBI be fully excluded from the purview of such lending.

Other potential loopholes

The consultation paper is also silent on regulations relating to operational aspects like how it plans to tackle conglomerates using such platforms to lend and borrow amongst themselves, which could play out as related party transactions, and also on the issue of bearing recovery costs. Some clarity here could be useful.

Way forward

An online platform is useful for two reasons: transparency for a borrower and lower transaction costs. As of now, the paper does not seem to explicitly bring out any sort of transparency from a borrower’s view point. It could, therefore, be prudent to form an index to loans with comparable ticket sizes/with comparable maturity levels.

If there is an iota of difference in this consultation paper issued by RBI and the discussion paper issued by SEBI on crowdfunding, it is that the former is relatively clear on what its regulation encompasses. The RBI has given specific parameters within which entities involved in P2P may operate. Comparatively, SEBI was silent on even the basic parameters including the entity structure and prohibition of cross-border transactions. The overarching point, however, is RBI over-regulating? Only time can provide some sense.