RBI strengthens P2P lending regulations to enhance transparency and reduce risk

The Reserve Bank of India (RBI) has revised its regulatory framework for non-banking financial companies facilitating peer-to-peer lending (NBFC-P2P) in a move aimed at curbing malpractice and enhancing transparency in the sector.

The updated regulations, effective immediately, follow RBI’s observations that several platforms were violating existing norms, leading to potential risks for lenders and borrowers alike.

One of the key amendments is the explicit prohibition on NBFC-P2Ps assuming any credit risk, directly or indirectly, the RBi circular noted. Previously, platforms were not allowed to provide credit enhancement or guarantees. The revised guidelines go further, ensuring that the entire risk of principal and interest loss is borne by the lenders.

RBI emphasises that P2P lending is inherently risky and platforms must make it transparent to all participants.

In addition, the RBI has introduced more stringent disclosure requirements. Platforms must now disclose not just the performance of their loan portfolios but also the specific losses borne by lenders.

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This level of transparency is designed to provide lenders with a clearer understanding of the risks involved, countering any misleading assurances of returns that some platforms might have previously suggested.

The RBI has also tightened the rules around fund transfers between participants on P2P platforms. The updated guidelines mandate that all transactions must go through escrow accounts, which are operated by a bank-promoted trustee. Furthermore, funds cannot remain in these accounts for more than a day after receipt and need to be transferred to either the borrower’s or lender’s bank accounts.

This change is intended to prevent any misuse of funds and maintain a clear separation of roles between the platform and the financial transactions.