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November 24, 2017

New P2P Lending Regulations: An Entrepreneur Perspective

Venture Intelligence spoke to Mukesh Bubna, Founder & CEO of Peer to Peer (P2P) lending firm Monexo's on his take on the impact of the new RBI regulations on the sector and the expectations going forward.

Venture Intelligence: What was your initial reaction to the recently introduced RBI regulations on P2P?

Mukesh Bubna: RBI ushering P2P platforms as a new class of NBFCs is a welcome move that provides the entire sector increased credibility and reinforces the potential of a marketplace approach to credit delivery. RBI’s insistence on a business continuity plan in case of platform shut down, ‘Fit and proper criteria’ for promoter team are all steps that will boost confidence of platform lenders.

Despite the existence of a few grey areas around definitional constructs and prudential caps on participants’ exposure, the framework does enough to lend clarity on key issues surrounding operational requirements, role of the P2P platform as an intermediary and mandates the adoption of measures that are likely to promote further transparency. The regulator’s willingness to come forth and closely engage and seek the view of P2P platforms post the announcement of guidelines is also reassuring and comforting.

VI: How does the RBI’s order barring P2P companies from lending on its own affect the industry?

MB: The regulations mark off P2P lending as an investment with a defined risk-reward equation. This enables P2P platforms to focus on sourcing unsecured loans and adopt best practices to minimize risk and not attempt to completely eliminate it either by mis-selling or by promotion of approaches that provide for ‘secured returns’. This will also help lenders make better informed decisions and help them adhere to a loan selection policy that is in line with their appetite for risk and expectation of return.

How does the minimum capital requirement and leverage ratio factor, given that P2P companies are to operate only as an intermediary platform? 

Regarding minimum capital requirement, we believe that RBI’s emphasis was on ensuring that the P2P space lends itself as a credible and sustainable environment. While this may appear to be a high cost burden on an entity that is fundamentally not lending its own money or holding funds on its balance sheet, the capital requirement mandate ensures that platforms have sufficient skin in the game and are invested in building a platform that is robust, responsive and scalable. The process of application of a leverage ratio to P2P platforms is however presently ambiguous and we look forward to more clarity on this from the regulator.

On caps on lenders and borrowers? 

The value proposition in a P2P platform from the borrowers’ side has always been that it enables credit inclusion at fair rates of interest. The imposition of a cap on the aggregate amount that can be availed by a borrower, seems in conflict with the vision behind enabling P2P platforms to further democratize the availability of credit across individuals and small businesses. The borrower participation cap may dissuade emerging MSME businesses from tapping into P2P platforms as a viable source of credit.

On the lending side, the introduction of an arbitrary INR 10 lakh limit on lending without due consideration to the nature of the lending participant makes lender acquisition a high volume retail game focused on retail investors - no doubt a large mass market but also one with significantly lower risk appetite.

Having said this, we are optimistic that RBI will be willing to gradually taper off such caps over time which will enable HNIs and institutional investors to look at P2P lending as a ‘serious’ asset class for long term wealth creation.

What will P2P companies now focus on to grow their business? How should VCs evaluate P2P companies going forward?

With RBI regulations in place, the short term focus for the existing P2P players will be applying for registration before January 2018, plugging gaps in current practices and getting compliance requirements and supervision right. The key activities which P2P players have to continue focusing on are (a) Credit model to screen out bad borrowers (b) Digital on boarding of customers (c) Forging key alliances for growth and (d) Managing profitability

For VCs, P2P lending in India is at an early stage of evolution. Most P2P players are raising Pre - Series A or Series A. At this juncture the team and traction are strong pointers for VCs to look at. Currently, VCs are also wondering whether the cap of Rs. 10 lakhs per lender could be hindrance to the growth of the industry. However, no regulation is cast in stone and always evolves as the industry evolves. It is time for the VC's to place their bets.

Where has Monexo hit right with the RBI regulations? What other innovative features has Monexo implemented?

We were the first to implement an operational Escrow account with a leading trustee company when most P2P platforms were still passing around physical cheques between borrowers and lenders. Our decision was in line with RBI’s decision on the need for funds to move directly between borrower and lender’s bank accounts and adoption of the Escrow framework.

At Monexo, we have had disclosure norms focused on promoting transparency such as mandatory regular data sharing with respect to loan statistics, delinquency details etc, which provided useful metrics to lenders with sufficient visibility over the platform’s track record as an intermediary instead of relying on assumptions of credit quality. Having said that, the requirement to share the borrower’s entire information including personal info seems a bit excessive at this stage as it diminishes the platform’s role as an intermediary to manage the marketplace.

We had also adopted a fair approach that affixes each loan on the platform with a fixed interest rate from 13 - 30% and an associated Monexo credit rating compared to alternative approaches that tend to be ‘negotiable’ and ‘bid-based’ between participants in other platforms.

How will the added role of Credit Bureaus help the P2P industry?

The ability to report loans into credit bureaus is a huge positive with significant benefits to both borrowers and lenders. Borrowers who avail loans through P2P platforms have the ability to improve their credit scores over time, subject to good credit behavior while intentional defaulters are heavily disincentivized from entering the system which in turn will provide added comfort to lenders.

Is the regulation in line with Monexo’s and industry expectations?

Overall, our view is that the RBI has pursued a progressive agenda focused on arming P2P platforms as NBFC’s that will pursue an alternative credit model focused on expanding and deepening access – driven by innovation, reduced costs and increased transparency. The regulation provides the P2P industry with the recognition that it has the ability to be a transformative new addition to India’s consumer finance ecosystem.

At Monexo, we are already beginning to see enormous enthusiasm from the investing community which is now beginning to take notice of P2P lending as an official asset class that is backed by a regulatory framework. No piece of regulation can claim itself as being entirely perfect and in that context - the regulator’s conservative tone in terms of participatory caps and minor definition vacuums, we hope, will gradually evolve into a more perfect framework that provides aspiring fintech startups like Monexo the ammunition to operate on a larger canvas focused on pioneering a more efficient, scalable approach to consumer credit needs. 

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