Page 50 - Banking Finance January 2024

ARTICLE

Risks involved in P2P Lending pandemic, defaults and losses may increase substantially.
Industry need to address such issues and educate the
P2P lending sites only facilitate the lending transactions and
investors in order to enhance awareness among the
their funds are not involved in the lending which means that
participants.
funds of investors are directly lent to borrowers without any
intermediation of any bank. Though these sites undertake
Further in absence of deposit insurance the fate of public
due diligence and physical verification of credentials of the
money in case of platform failure or operational failure and
borrowers yet investors are exposed to the greater risk of
bankruptcy has not yet been discussed much. Although many
default and fraud. Loss given default is further deteriorated
sites, such as Zopa, allow investors to sell loans they hold
due to the unsecured nature of advance. Majority of
for a fee. Cyber security and data leakage risk also need to
investors may not be capable to assess and quantify the risk
be looked into.
involved in the transaction. As a risk mitigant, some
companies like Zopa and RateSetter in UK maintain reserve
In India several factors have impacted the growth of P2P
fund to provide compensation in case of default.
portals. Turmoil caused by failure of IL&FS, one of the largest
NBFC, triggered regulatory tightening and limiting the
Investor awareness becomes very important in such a
regulatory arbitrage by RBI. Loan app scams mainly by
scenario where unsecured loans are granted with higher
unregistered Chinese entities and reported incidents of
rates as investors are exposed to so many risks. General
suicides in some parts of country on account of unethical
prudence is advisable on the part of investors before
means of recovery had also prompted the regulator. Covid
entering the P2P lending market. One should understand
caused economic slowdown was also among some major
the various types and extent of risks involved in the process
issues which the sector faced.
to safeguard hard earned money. As P2P portals work on
different set of terms and business models, individual
lenders should compare them to find the best match in view Regulatory Framework in India
of financial goals, risk tolerance, and investment strategies RBI issued guidelines in regard to P2P lending platforms in
October 2017 giving all the P2P platforms a legal
In India RBI has prescribed an upper limit of Rs.50000/- recognition. Now P2P lending companies have to register
single lender can lend to same borrower. This prudential themselves mandatorily with RBI. Based on the
norm ensures diversification to provide protection to the technological, entrepreneurial and managerial resources
investors against expected level of loss. along with capital structure, approval is accorded by RBI.

In case of economic disruption as witnessed during covid P2P lending company can act as an intermediary providing
an online marketplace or platform to the participants
involved in Peer to Peer lending however it cannot accept
deposits or lend on its own. Only unsecured loans are
permitted. P2P lending company is entrusted with
responsibilities of undertaking due diligence on the
participants. As per RBI guidelines P2P portal will also be
responsible for credit assessment and risk profiling of the
borrowers, documentation of loan agreements, assistance
in disbursement and repayments of loan amount and
recovery of loans originated on the platform.

Leverage ratio has been capped at 2. Aggregate exposure
of a lender to all borrowers at any point of time, across all
P2P platforms, is capped at Rs.50,00,000 while aggregate
loans taken by a borrower at any point of time, across all

44 | 2024 | JANUARY | BANKING FINANCE