The Reserve Bank of India’s (RBI) recent penalties on four major P2P platforms—Rang De, Faircent, Financepeer, and Finzy—highlight systemic non-compliance, weak corporate governance, and regulatory violations. A model designed to democratize credit is now at risk of becoming a breeding ground for financial mismanagement and ethical lapses.
Experts say the recent penalties are a wake-up call, but fines of Rs 10-40 lakh are insufficient deterrents for firms handling transactions worth crores. If systemic non-compliance persists, the RBI may escalate punitive measures, including licence suspensions and criminal liability for severe breaches, they say.
For the P2P lending industry to survive, platforms must adopt stricter compliance measures, undergo frequent audits, and face harsher penalties for governance failures. Investors, too, must exercise caution—P2P lending is an unsecured loan product, not a fixed deposit. The promise of high returns must be weighed against the inherent risks, especially in an environment where regulatory scrutiny is intensifying.
Under regulator’s lens
The RBI has long signaled concerns about P2P lending platforms exceeding their regulatory boundaries. A prior directive had emphasized that P2P platforms must act solely as facilitators of credit, not as risk-taking entities. Despite ample time for course correction, several platforms continued to operate in ways that contravened these guidelines, prompting the RBI’s recent crackdown.
Despite these regulatory concerns, investor interest in P2P lending has remained strong. Platforms like LendenClub, Lendbox, Liquiloans, Faircent, and Finzy have attracted significant backing from investors, including prominent venture capital firms. Liquiloans, for example, counts Matrix Partners and Cred among its backers, while Faircent has received investments from JM Financial. The appeal lies in high returns—P2P platforms offer yields of 9-12%, significantly above traditional fixed deposits’ 7-9%. However, with higher returns come higher risks, a reality many investors overlook until crises emerge.In the race for expansion, many platforms have ceded control over critical processes like KYC and interest rate determination to third-party service providers, exposing systemic vulnerabilities.
Key regulatory focus areas
The RBI’s recent actions are a response to identified risks, particularly around eliminating credit risk within P2P platforms. The central bank prohibits these platforms from taking on credit risk or offering guarantees, yet some have subtly provided default protection to attract more business. The RBI’s April 2024 directive on digital lending reinforced the stance that such practices are unacceptable.
Additionally, the RBI has imposed an aggregate exposure cap of Rs 50 lakh per lender across multiple P2P platforms. This measure likely stems from concerns over rising bank credit flows into P2P platforms, which could create systemic risks. Transparency in borrower disclosure is another focal point, with NBFC-P2P platforms mandated to disclose borrower details, including identity, loan amount, interest rate, and credit score. Any opacity in these areas increases the risk of financial mismanagement and fraud.
Lessons from China’s P2P collapse
Once the world’s largest P2P lending market, China’s industry collapsed under the weight of defaults and fraudulent activities. By 2020, the country’s banking regulator had effectively wiped out the sector. The Indian regulatory environment is stricter, but without proactive intervention, a similar fate cannot be ruled out.
In China, P2P platforms initially operated as intermediaries but gradually assumed fund management roles, pooling money and offering guaranteed returns. This model unraveled when simultaneous defaults and mass withdrawals triggered an industry-wide collapse. In India, while regulations explicitly prohibit P2P platforms from holding lender or borrower funds, some platforms continue to market misleading features like “anytime liquidity” and “guaranteed returns.” Such practices create an illusion of safety, luring retail investors into high-risk investments under false pretenses.
