RBI’s Consultation Paper on P2P Lending - A Case of Unmindful Contradictions

At a time when India is coming to grips with a Fintech revolution characterized by sprawling innovations and a new breed of ever-enthusiastic entrepreneurs, one would expect the regulatory response to be equally forthcoming and geared to meet such market dynamism. However, any hopes of regulatory prudence were laid to rest with the Reserve Bank of India’s (RBI) recently released consultation paper on peer-to-peer lending in India. In essence, RBI seeks to regulate pure marketplace-based P2P lending platforms in the same way as “non-banking financial institutions”, a catch-all category for firms carrying out “financial activities” outside the formal banking system. Heavy-handed capital and leverage ratio requirements have been proposed along with strict reporting requirements, unmindful of the variety of such platforms in terms of range, breadth or business models.

In our piece, we argue, first, that RBI’s attempt at regulating purely marketplace-based P2P platforms reeks of regulatory appropriation, insofar as P2P platforms do not perform any functions which can be even remotely characterized as “financial” owing to the fact that they merely assume the role of a facilitator of lending between two individuals. Second, we highlight how the financial regulator in India has completely failed in its attempt to strike the delicate balance between regulatory caution and rational optimism.  

Jitendra Soni is an Associate at Cyril Amarchand Mangaldas, New Delhi and Kanad Bagchi is an MSc Candidate in Law and Finance at the Faculty of Law, University of Oxford, England. Views of the authors are their own and should not be attributed to the institutions they are affiliated with.