Around the world, there is a buzz around peer-to-peer lending. In countries such as the USA and China, peer-to-peer lending businesses have grown to be billion dollar enterprises thanks to longstanding social security systems that capture fiscal data of citizens making it easier for institutions to lend. The borrowers are also excited as low cost loans are available for various purposes ranging from a vacation to a payday loan.
In a classic case of India being affected by a global phenomenon, the peer-to-peer lending space in India has also witnessed a boom with at least 20 players having entered just last year. Some of them are already receiving million dollar valuations despite still being start-ups.
Rang De, together with such participants, has been part of discussions initiated by the Reserve Bank of India as it seeks to regulate peer-to-peer lending platforms.
This initiative is important given the crisis faced by the Indian microfinance industry in the early 2010s when regulation was badly needed.
During the peak of the crisis, a large number of micro-finance institutions eagerly lent to rural citizens who had little or no means to repay. They were able to do so in the absence of financial oversight. Such rampant indebtedness drove borrowers to further avail credit from moneylenders just to repay the loans that they had borrowed from micro-finance institutions.
The crisis spiralled to the extent where some borrowers had loans to repay every day of the week!
Abusive measures adopted by loan recovery agents worsened matters. An estimated Rs 8,000 crores remained unpaid by borrowers. While the ordinance banning micro-finance in Andhra Pradesh was carried out with good intentions, a spate of suicides, children dropping out from schools, a spike in alcoholism among men in rural India were just some of the other outcomes of the crisis as well as the hit to its reputation that the Indian micro-finance industry suffered.
Proactive regulation is one way to ensure that history does not repeat itself.
The Reserve Bank of India came out with a Consultation Paper in April 2016, seeking comments from existing and potential stakeholders, a welcome move coming at a time when the sector is not yet overcrowded.
I had the chance to be part of a round table discussion on the Consultation Paper organised by ACCESS-ASSIST in May 2016.
ACCESS-ASSIST had incidentally developed a status paper on the issues, challenges and opportunities for crowd-funding in Indian micro-finance as part of the Poorest States Inclusive Growth programme funded by the Department for International Development, Government of United Kingdom.
The primary focus of the round table discussion was the value of crowd funding investments for development as it can offer new products, reach underserved geographies, regulate the platforms and support required for scaling up the model in the micro-finance sector. The aim was to also develop and send to the Reserve Bank a consensus based consolidated feedback on the Consultation Paper.
Representing Rang De as an organisation, I presented the need to ensure that the regulations, when finalised, must cater to organisations offering credit not just to the top or middle of the pyramid but also to underserved communities. For example, for-profit companies entering the peer-to-peer lending space for borrowers at the bottom of the pyramid need to be discouraged lest it lead to over-lending or indebtedness.
Not-for-profit lending platforms should be allowed to work with intermediaries such as non-governmental organisations, micro-finance institutions setup as societies/trusts, self-help groups, federations, cooperative societies in order to better serve disadvantaged communities lacking technology, skill or direct access to online platforms.
We need to ensure that there is transparency in the legal and ownership structures of peer-to-peer lending platforms by mandating disclosure (ideally on the platform itself) of the investors/funders who are stakeholders for the benefit of both the borrowers as well as individual lenders.
Authenticity of the transactions must also be encouraged by mandating all peer-to-peer lending platforms maintain Know-Your-Customer or KYC documents in respect of all the borrowers. Innovative solutions such as the introduction of an electronic KYC or eKYC can also be brought in over time.
A cap on interest rates for all loan products is another recommendation that I believe should be critically considered in order to prevent a repeat of the crisis that hit the micro-finance industry in early 2010. Furthermore, there should be detailed disclosure of the rates of interest, preferably in the form of Annualised Percentage Rate, the charges and facilitation fees, if any are being charged, in addition to, or as part of, the interest rate.
It is Rang De’s vision to be an equal player in a sector that comprises for-profit as well as not-for-profit enterprises while still remaining committed to serving the underserved on a national scale. In doing so, we hope to partner with the Government of India and specifically the Reserve Bank in all ways possible to ultimately achieve the dream of making India a universally, financially inclusive nation.
Ultimately, I think we can play an important role as a conscience keeper in an industry that has the potential to impact lives and livelihoods of a large number of Indians.
Ramakrishna NK is the Co-Founder and Chief Executive Officer at Rang De and an Ashoka Fellow. For media related queries or other matters, write in to firstname.lastname@example.org