How RBI Regulations and Certifications Will Benefit the P2P Lending Industry and Its Participants

Surendra Kumar Jalan, Founder & CEO, OHMY TechnologiesIndia’s peer-to-peer (P2P) lending industry has seen a marked rise in loan disbursals, while several new platforms have come into existence over the last two years to meet the rapidly growing demand for this alternative lending service. One of the biggest drivers of this is the substantial disproportion in demand for and supply of credit in the Indian economy at present, be it for consumers or MSMEs. There are an estimated 51 million MSMEs in India employing about 11 crore people, that contribute nearly 40 percent to the country’s GDP.

Despite this, MSMEs are extremely underserved by traditional banking institutions, especially when it comes to meeting their credit requirements. Similarly, individual consumers who need credit are often shown the door by formal banks and lenders due to poor credit scores or the lack of a credit history. The situation today is such that more than half the country’s population remains unbanked and cut off from the mainstream credit market. Online P2P lending holds a tech-driven solution to this problem, and is capable of addressing the credit gap by facilitating smoother access to affordable credit to the country’s masses.

The RBI’s decision to recognise and regulate the Peer to Peer (P2P) lending platforms (industry) has given a much-needed fillip to the cause of financial inclusion and inclusive development in the Indian economy. Considering the technology behind P2P lending is relatively new and still evolving, the RBI’s move serves to recognise its value and its implications for the Indian economy’s growth. Credit is widely recognised as being the fundamental driver behind the economic upliftment of the people. Thus, legitimising P2P lending through recognised NBFC-P2Ps will likely boost the circulation of credit within the economy to the benefit of various segments that suffer due to the lack of it, and enable their access to a new-age credit source.
How certified NBFC-P2Ps and RBI regulations will impact the lending ecosystem
One of the most important benefits of the legal status accorded to the P2P lending industry is that it has established the credibility of the business model of the P2P lending platforms operating in the country. There are around 15 online peer-to-peer (P2P) lending platforms currently operating in the country with a combined loan book value of nearly $25 million. This value is estimated to reach around $4 billion over the next five years, given the huge, unmet demand for credit in the country. The legal recognition will also enable P2P lending companies to access opportunities for investments and fundings from their equity investors, which will be critical in allowing them to scale up their businesses over the next few years.

The regulations introduced in the industry and the certifications given to recognised P2P lending companies or NBFC-P2Ps have alleviated any doubts or fears that consumers or SMEs may have in terms of their legal acceptability or Governance. As a result, this segment of alternative lending is expected to gather greater momentum in the coming future, drawing larger number of borrowers and lenders to facilitate the creation of an alternative credit ecosystem.

As an alternative to the traditional banking sector’s antiquated approach to lending – driven largely by CIBIL scores as the main underwriting methodology – the technology-driven P2P lending model offers benefits like decentralisation, speed, transparency, and efficiency. The biggest reason an increasing number of Indians today prefer online lenders over banks and NBFCs is that their underwriting process is much more transparent, allowing even high-risk borrowers to secure funds in a hassle-free manner with minimum paperwork. Thus, unlike traditional banks, online P2P lending caters to a large number of consumers who do not have a credit history or a CIBIL score, but require access to affordable credit.

Furthermore, by recognising the P2P lending model, the RBI has not only further brightened the prospects of credit-hungry consumers and businesses in the country, but also introduced Indians investors to a lucrative asset class that is more dynamic and advanced than most other investment instruments currently available in the market. As an investment opportunity, P2P lending offers higher long-term returns to lenders at relatively lower risk, which help them build stronger asset portfolios. Considering benefits such as these, P2P lending could come to account fornearly 15-20% of the portfolio of sophisticated Indian investors over the next few years. The inclusion of P2P lending companies into a regulatory sphere will also make it capable of competing with traditional investment instruments such as bank deposits, mutual funds, stocks, etc.

Regulations will not only help the P2P lending industry carve its position as a credible and mainstream segment of financial services, but will also create significant value for our credit-starved economy. In addition, collaboration between regulators and P2P players will ensure smooth implementation of reforms in the industry, thus facilitating the creation of a strong alternative lending ecosystem in the country.