We are weeks away from the Reserve Bank of India (RBI) coming out with its rules to regulate the peer to peer (P2P) lending industry in the country. A welcome step, this is something that most organized players in the sector, including us, have been pushing for.
With the regulations in place, P2P can formally be counted as one of the institutional sources of raising funds and also an investment. The gray areas are expected to be ironed out and it is widely believed that the regulations will be progressive in nature. P2P platforms are expected to be categorized as an NBFC, which is in sync with the industry expectations.
The regulations will lay out the corporate structure that each of the platforms would need to follow and most importantly the DOS and Don’ts related to dealing with lenders and borrowers. However, of late, there has been an interesting trend of platforms coming up with a lender protection fund. What does it do? In case a lender loses the money he has extended to a borrower as a loan, the lender protection fund is expected to cover the losses for the investor. On the face of it, it sounds like a good idea, but if you dig deeper, there are several issues.
Let me start with the analogy of airlines. Airlines do not offer people flying with them parachutes because the whole premise is that the plane should be built in a manner that its crash proof.
The flyer is aware of the risk, but he trusts the plane. You have a life vest under your seat for an emergency landing on water, but you do not have an escape pod that can be activated if a flight is about to crash. Similarly, the lender on a P2P site should be able to trust that the lending platform has built a system that can help Lender earn higher returns by mitigating risk. While a P2P platform cannot shirk its responsibilities when it comes to investor protection, having a fund to mitigate losses is not the answer. Proper systemic safeguards and strong ethics should alone…