It’s been over a month since the Reserve Bank of India’s (RBI) new regulations on peer-to-peer (P2P) lending came into effect, but the industry is still struggling to adapt. Several platforms have experienced a sharp decline in their activity, with some even seeing their volumes drop by 90%.

“Since the new regulations came into force, our volumes have fallen by 90%. We have started accepting new investments again, but a new product we have introduced is not attracting lenders,” says Bhuvan Rustagi, co-founder and COO of LendBox, a leading P2P lending platform.

The P2P lending model allows individuals to extend loans to others through RBI-regulated NBFC (non-banking financial company) platforms that connect lenders with borrowers. These platforms serve as intermediaries, facilitating transactions and overseeing reimbursements.

Due to declining volumes, some P2P platforms are even considering the possibility of ceasing operations. “The cost of transactions has increased significantly. Previously, we could process lump sum transactions at maturity, but now we have to do multiple transactions as funds need to be disbursed to each borrower on a T+1 basis, leading to increased operational costs. As a result, this business model is no longer viable,” says the founder of a leading P2P platform, on condition of anonymity.

“The cost of transferring funds, which will be borne by the borrower, will increase the cost of borrowing by the loan amount. This will result in a higher APR (annual percentage rate), making borrowing rates less competitive within the industry,” adds another P2P lending platform founder. The APR represents the total cost of borrowing, including interest and other hidden fees.

The expenses associated with the operation of P2P players have increased due to the revised RBI guidelines issued on August 16, 2024. The new regulations require that funds in escrow accounts of lenders and borrowers must be transferred within a day business (T+1), which is severely affecting the P2P lending model.

“Now, multiple deposits need to be made to the lender’s account, which has increased costs. Additionally, it has become difficult for lenders to manually select borrowers within the T+1 time frame if they wish to reinvest,” explains a P2P founder who wished to remain anonymous.

The new rules also prohibit lenders from engaging in lender-to-lender transactions. This means that money can only flow between the respective accounts of the lender and borrower. Therefore, loans offered in the secondary market were stopped, eliminating liquidity and premature withdrawal options. According to the RBI circular, “Funds from the bank accounts of the lenders shall only be transferred to the escrow account of the lenders and then disbursed to the specific bank account of the borrower, ensuring compliance with paragraph 8(3) of these instructions. The borrower will repay the loan from their bank account to the borrower’s escrow account, from where the funds will be transferred to the bank account of the respective lender.

An escrow account is a neutral deposit account where funds are held until the final transaction. Under P2P lending, once a lender decides to fund a loan, it transfers the amount to the lender’s escrow account, from where it is disbursed to the borrower’s bank account. The same process is followed for borrower repayments.

Following the introduction of these guidelines, the RBI imposed sanctions on August 23, 2024 on several P2P lending platforms for violating its rules. Innofin Solutions Private Ltd, also known as LenDenClub, was fined Rs 1.99 crore, while NDX P2P Private Ltd, also known as LiquiLoans, was fined Rs 1 .92 crore. The sanctions were imposed following a review conducted by RBI in June 2023, which found violations of the “Non-Banking Financial Companies – Instructions for Peer-to-Peer Lending Platform, 2017” and the “Guidelines on Lending digital” by these companies.

Despite these challenges, the industry remains optimistic. For example, IndiaP2P, which is launching a new product compliant with the new RBI regulations. “(We) are introducing the Monthly Income Plan Plus product in line with the new faster settlement requirements,” says Neha Juneja, CEO, IndiaP2P.

@teena_kaushal