How India's P2P Lending Industry Has Shaped After RBI's Strict Guidelines

KEY TAKEAWAYS

1. The RBI's August 2024 guidelines significantly impacted India's P2P lending industry, shifting the risk entirely to lenders and prohibiting platforms from promoting P2P lending as a no-risk investment product.

2. The guidelines banned the cross-selling of unrelated products, enforced T+1 settlement with escrow accounts, and required platforms to charge a fixed fee, affecting the revenue models of P2P platforms.

3. The industry saw a decline with some platforms shutting down or pausing operations, but resilient players like LenDen Club and IndiaP2P have adapted and are recovering.

4. The consolidation in the industry has led to lower customer acquisition costs, and some fintech startups are exploring P2P lending licenses, indicating potential growth.

5. The blog suggests that the RBI's strict guidelines have ensured that only serious and compliant players remain, creating a more secure environment for investors and a promising future for the industry.

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It’s been exactly a year since RBI’s August 2024 guidelines on P2P lending. So we at ALT Investor decided to dive deep into this industry and see where it is today.

India’s P2P lending industry had first come under formal regulation in 2017. However, things changed last year after RBI’s unforgettable circular tightened P2P lending norms.

In this blog, we’ll first briefly discuss the guidelines that RBI issued that impacted P2P platforms, and then see how the industry is shaping up today.

Let’s begin…

First, what were the RBI guidelines that impacted P2P lending?

While RBI’s circular had a bunch of changes, we’ll talk about a few of them which had maximum impact on P2P players.

1. Risk to be borne by lender

RBI stated that P2P platforms need to explicitly take a declaration from the user that he/she understands the risks of investing in P2P platforms, with the highest risk being that their capital could also go to zero. Essentially, with the circular, RBI said that the whole risk needs to lie with the user and not the platform. Moreover, platforms cannot promote P2P lending as an investment product with features like tenure linked assured minimum returns, liquidity options, etc.

This meant that the risk exposure was fully on the lender (user). It also meant that P2P players had to rework on how they would position their platform. It therefore immediately went from a no-risk platform (as positioned by a lot of P2P players) to a platform that had its fair share of risk.

2. Ban on sale of unrelated products

RBI’s circular banned platforms from cross-selling any other product, apart from loan specific insurance products. Since some P2P platforms had started cross-selling other products on their platform, this ban hit their revenues.

3. T+1 settlement with Escrow accounts

Probably the most hard-hitting guideline – RBI said that there must be at least 2 escrow accounts, where

• funds from the lenders’ bank account should only go into the lender escrow account, and eventually into the respective borrower’s bank account

• repayments from the borrowers will only go into the borrower escrow account, and eventually into the respective lender’s bank account

In addition to this, no funds should stay in either of the escrow accounts for more than T+1 day. This means that from the date the fund is received in the escrow, within a day, it should be transferred to the respective borrower/lender account.

If a borrower’s loan request isn’t fully funded within one day, any partial funds collected must be returned to the respective lenders.

Now this rule, while ensuring transparency and preventing any pooling of funds, created operational headaches for platforms. P2P platforms traditionally allowed a loan listing to stay open for days/weeks to gather multiple lenders; but RBI said that now funding must close in 24 hours.

Moreover, since the funds were supposed to be moved out from the escrow within a day, this meant that platforms could no longer use the “park now and withdraw any time” narrative for users on the platform.

4. Fixed fee to be charged by platforms

According to the circular, P2P platforms are supposed to charge a fixed fee (or a fee in proportion to the principal amount of the transaction) only. The fee should not be dependent on the repayment by the borrowers.

This reduced the flexibility for P2P platforms to earn revenue.

5. No matching within closed user group

Essentially, RBI said that lenders and borrowers cannot be matched within a closed user group. This meant no affiliate partnership models would exist. And since P2P lending programs of startups like Cred (with Cred Mint), BharatPe with (12% club) and Mobikwik (with Mobikwik Xtra) were all based on closed group matching (within the same user base), they all had to shut shop.

While these startups didn’t have their own P2P platform, they had partnered with players like LenDen Club, Liquiloans and Lendbox for these offerings. So this guideline impacted all these platforms combined.

While there were a lot of other points to comply with, these were some of the most hard-hitting guidelines that impacted P2P platforms.

So how has the industry evolved and where is it today?

Let’s dig deeper…

What does the industry look like today?

There is a narrative going on which says that the industry is declining, it’s doomsday and the future is bleak. But our interactions with platforms that are still running, say otherwise. Let’s look at the impact one by one.

First, B2C payment apps that had a P2P play in them without actually having a P2P license (and were offering these products by way of partnerships) – like Cred and BharatPe, either shut their programs or paused them. This also affected volumes of P2P players who had partnered with them at the backend to provide the core services, like LenDen Club and Lendbox.

Some P2P license holders also shut down or downsized. Liquiloans for example, at the time of writing this article, had stopped issuance of new loans, and was focusing on collections instead. There were reports that Faircent too has stopped disbursing loans. ALT Investor, however, could not verify this claim.

Having said that, a lot of other smaller P2P startups had also either shut down, pivoted or played the “wait and watch” game for the industry to mature.

There are some players that were resilient though. LenDen Club and IndiaP2P, for example, are back in the business already, with compliant systems and processes.

While the disbursal volumes are still anywhere between 15% and 30% of pre-2024 levels, they’re rising steadily.

According to Bhavin Patel (CEO, LenDen Club), the industry should be back to peak levels in about 18 to 24 months.

For IndiaP2P, volumes are already reaching pre-2024 levels, in fact with lower customer acquisition costs (CAC). Neha Juneja (CEO, IndiaP2P) feels that this could be the case industry-wide, and not just for their business.

A major reason for the lower CAC is consolidation – Given that the demand for loans is still high, lesser platforms now disbursing loans means lower marketing required, which in turn means a lower CAC.

In fact, there are reports of other fintech startups like Jupiter and 1Finance also looking at P2P lending licenses. These claims, however, could not be verified by us.

So what’s the verdict?

All said and done, while the last year was tough for P2P platforms, the few who have continued to build compliant systems are the ones who, it seems, will reap the benefits. Our opinion at ALT Investor is that the narrative about “RBI making it difficult for P2P businesses to operate”, is very nuanced, and probably not true. The guidelines have, in effect, ensured that only serious, compliant players remain in the business – making the environment more conducive for investors (lenders).

Bhavin also emphasised that given the concerns RBI had, regulatory actions were actually necessary. But strict regulatory actions don’t necessarily mean it’s bad for the industry. The future, according to him, will see good growth with more compliant businesses.

And we agree. P2P lending, if done well, is a great product – for lenders and borrowers both.

So all in all, the worst phase for P2P platforms seems to be over. Let’s see in which direction the industry moves in the coming months. Our bet is on “upwards”.

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Please note that this is an opinion blog and not official research advice. This blog aims to promote informed decision-making and neither encourages nor discourages you from investing in any asset class or deals or platforms.

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