MUMBAI: The Reserve Bank of India (RBI) ban on default loss guarantees for peer-to-peer (P2P) lenders is likely to dent the business volumes of some platforms as they will need to redraw their partnership agreements or switch to open market sourcing of investors.
“Platforms that relied on the 10% first loss default guarantee (FLDG) earlier may now need to tighten their belt. If the risk needs to passed on to the individual investor, then they need to be trained to understand the risks involved in P2P lending,” Mukesh Bubna, founder and chief executive officer, Monexo said, adding that some platforms may see an up to 15% slowdown in business volumes.
On April 26, the RBI issued certain clarifications on the permissibility of default loss guarantee in digital lending. Notably, the central bank barred P2P platforms from entering into DLG arrangements. The central bank’s diktat comes at a time when the P2P lending industry is witnessing a growth slowdown, largely due to a lack of regulatory clarity on certain practices.
In February, the RBI deputy governor Rajeshwar Rao highlighted that some of the practices of P2P platforms “do not appear” to be in line with regulatory guidelines. In recent months, these platforms have voluntarily stopped offering liquid investment options after the RBI expressed displeasure over instant withdrawal products.
According to the RBI’s norms, the role of P2P platform is limited to acting as facilitator between lenders and borrowers. Any financial involvement on the part of the P2P platform is restricted, say experts.
Nim Dem Dorjee, partner at IndiaLaw Associates argues that while RBI permits banks and non-bank lenders to have a default loss guarantee arrangement with loan service providers, excluding P2P platforms may make them less attractive.
“This will encourage them(P2P platforms) to use alternative structures to use the benefits of offering default loss guarantee (DLG) structures to their customers through strategic partnership or other methods,” she said.
DLG arrangements garnered popularity in 2021-22(April-March), coinciding with the increased demand for credit. Some platforms were offering 40-50% guarantee, in line with their arrangements with P2P lenders who had the onus of bringing in investors to lend to customers. However, with the recent clarification, the RBI has reiterated its intention to improve governance in the digital lending space, say experts.
“Bringing the axe down upon such DLG arrangements between P2P lenders and lenders, not only impacts the customer acquisition costs but also bares out the risks of P2P lending among investors,” Amit Kumar Nag, partner, AQUILAW said.
“Undermining the risk protection mechanism of the FLDG arrangements will heavily impact P2P lenders who had indulged into partnerships with platforms based on the assurance that they could fall back on such DLG,” he added.
Vatsal Gaur, partner at King Stubb & Kasiva, Advocates and Attorneys notes that the absence of default loss guarantee might discourage investors from P2P platforms, partly because of the risks involved with credit loss.
For instance, P2P platform Lendbox has lending partnerships with entities like Freo, MobiKwik, OkCredit, among others. Similarly, LenDenClub works with platforms like Google Pay, PhonePe, Cred, and BharatPe.
“In our case, we have already restructured our arrangements some time ago to be in line with the RBI’s guidelines. So, this has not come as a surprise to us,” Bhuvan Rustagi, co-founder and chief operating officer, Lendbox said.
“Any platforms that were entering into default loss guarantee arrangements will obviously have to restructure them immediately and it is possible that some customers might opt out,” he stated.
Source: The Financial Express