Changes in P2P Norms: Collapse of the marketplace model?

Vinod Kothari | finserv@vinodkothari.com

Introduction

The RBI’s 16th August 2024 changes in P2P Directions  may have been inspired by its supervisory observations, and comments by some observers and experts, but the likely impact of the changes may be to make this disintermediation model operationally tough to the extent of unviability. 

The key spirit of the amendments is that P2P Platforms (P2PPs) cannot function as virtual alternative deposit-taking entities, promising liquidity, reinvestment and giving tacit assurance of rates of interest. However, to enforce its intent, the regulator has also provided that the lenders’ funds will be called only on “just in time” basis, that is, only when they can be lent within a day. Further, the regulator has put specific stipulation against any secondary market in loans on a P2PP, whereas, for any mode of savings or investment, an exit when needed is a necessary attribute.

Just-in-time availability of lenders:

P2P, like any platform, premises itself on the ability to match the two parties to the bargain. To the borrower, it has to promise funds; and to the lender, it has to promise deployment. Since no borrower may conceivably wait until the P2PP ramps up requisite lenders, the only intuitive solution would be that the P2PP gets lenders, keeping their money in readiness mode, to be deployed when borrowers are available. However, the regulator has now prescribed that, effective 15th November, the funds in lenders’ escrow should not be there for more than 1 day.

It is important to realise, and it seems that this point has escaped attention of the regulator, that funds in lenders’ escrow need to be a state of readiness for 2 reasons: one, at the time of the lender first investing his money; and secondly, as repayments trickle in from the various loans given to borrowers. As a matter of prudent spreading of the risks of a lender, one particular lender’s funds are not lent to a single borrower – on the contrary, the funds are spread, say over 100 or even larger number of borrowers (a process called “mapping”, which has been recognised by the regulator). Thus, each lender would have lent to hundreds of borrowers, and each borrower would have borrowed from hundreds of lenders. Thus, for each such lender, money starts trickling in small bits and pieces every month. If this money is not reinvested into new loans, the lender’s whole purpose, which was to keep money invested and not just to invest it in one cycle of loans, will not be met. Now, between the repayment of the existing loans, and the redeployment into new loans, there may be a time gap, which may be a few days. Under the new regulatory framework, if the money is not redeployed within a day, the money will have to flow back to the lenders.

If the regulator’s expectation is that the P2PP would be making calls on lenders every time there are borrowers, and the lenders will have ready availability of funds to meet such calls, it is quite an impractical expectation. Such a perfect match between cash inflows and cash outflows is aggressively optimistic. In global markets, there are “warehouse financiers” who provide temporary funding to meet these gaps, but that is not the case in India.

In fact, the whole existential idea of P2PPs is disintermediation.

If the Airbnb model will become impractical if the platform starts searching for houses only when an occupier is ready to check-in, the same argument applies with a stronger force in case of loan-connecting platforms. 

It seems the regulator may not have been happy with the redeployment of funds by the P2PP, but that is exactly what a lender would want and need. The lender should be free to choose to reinvest his funds, or retrieve them, to be able to get a slow exit.

Lenders providing exit to lenders

In P2PP, a lender provides loans to borrowers; but can a lender buy existing loans given by other P2PP lenders to borrowers? A priori, there should be no reason why a lender could have given a loan to an unknown borrower, but couldn’t have bought the loan taken by an existing borrower. After all, for existing loans, there is a history of performance as well as seasoning. If existing loans given by a lender are bought by incoming lenders, the process will lead to creation of a so-called “secondary market”, which will allow existing lenders to exit by selling their portfolio of loans to incoming lenders. It is in the public domain that the P2P industry has been making a case for such secondary market. 

The amended Directions have inserted a clause in reg 6 (1) to say: “NBFC-P2P shall not utilize funds of a lender for replacement of any other lender(s)”. This clause may either be interpreted to mean that there is an absolute bar on secondary marekt in P2P loans. Or, there may be another interpretation: that the right of using the funds of a lender to buying existing lenders shall not be available to the P2PP. However, if that is something that the incoming lender himself wants, that is the exercise of a prudent discretion by the incoming lender, and there should be nothing wrong with that. If it is the first interpretation that the regulator has, then putting a bar on secondary market is most undesirable, given the nature of P2P investing. Exit opportunity is needed for almost every mode of investment. But it becomes critical inthe case of P2P investing, because of the granular spreading of the loans discussed above. Therefore, every lenders’ loans trickle back over a long period, and if the lender has chosen to reinvest the repayments, the period becomes infinite. If at any stage the lender needs to exit, he will have to wait for months and months for the loans to repay. Since need for exit may arise due to exigencies which cannot wait, the slow and protracted exit is unlikely to serve the needs of the lender. As a result, it is only such lenders, and only for a very small part of their lendable portfolios, who can afford to invest in P2PPs, making it a leisurely investing game of one who is flush with money. The whole idea of P2PPs is to take them to a modest lender, so that he may lend at affordable rates to a modest borrower. The idea of reducing cost of lending by a lending marketplace can only be met if the platforms become more and more inclusive on either end. Putting a bar on the secondary market will make it exclusive, rather than inclusive.

See P2P India Report 2023 here