Mains Paper 3: Economy | Effects of liberalization on the economy, changes in industrial policy and their effects on industrial growth
From UPSC perspective, the following things are important:
Prelims level: Particulars of the NBFC-P2P
Mains level: The article comprehensively discusses issues related to NBFC-P2P
- The article talks about the RBI’s policies on NBFC-P2P.
Recent decision of RBI on NBFC-P2P
- The RBI has recently classified peer to peer (P2P) lending platforms as non-banking financial companies (NBFC-P2P)
- Following this, RBI has issued detailed master directions governing the operation of such platforms, which raise some interesting PRELIMINARY QUESTIONS
Particulars of the NBFC-P2P
- As a registered NBFC-P2P, the firm can only provide a technology platform, through an online marketplace, to connect the lenders and borrowers, and related services such as loan documentation, loan recovery, etc.
- They are not entitled to conduct the business of lending and borrowing themselves
- In addition, they can provide credit assessment and risk profiling of borrowers, which is disclosed to potential lenders to make an informed decision
Question.1) Is RBI regulating a tech company as an NBFC?
- RBI has argued that the sector needs to be regulated and to protect participants from succumbing to unethical or coercive practices
- RBI can generally regulate entities operating either as banks or NBFCs
- P2P platforms are not banks, since there is no balance sheet lending
- Generally, entities with their principal business being financial activity are considered as NBFCs and required to be registered with RBI
- These conditions too are not satisfied by P2P platforms, since their primary source of income is commission from services
- However, the RBI has special powers to classify any entity as an NBFC, after consultation with the government which it has exercised to classify P2P platforms as NBFC-P2Ps
- The RBI has used this in the past to regulate mortgage guarantee companies and account aggregators
Question.2) Are the master directions detrimental to P2P start-ups?
- NBFC-P2Ps are expected to be a small subset of the various NBFCs operating in India.
- Due to the classification, NBFC-P2Ps are now subject to new conditions such as minimum net owned funds of Rs2 crore, leverage ratio of 2 and limited scope of activities
- As a result, the entry barrier for new start-ups has increased considerably, and the ability to move into ancillary business lines has been restricted
- For existing P2P players, while there may be initial hardship, and certain modifications required to their current business model, they already have certain aspects of the regulations coveredg
Question.3) Should investors reconsider their board strategy?
- For all NBFCs, approval of RBI is required if more than 30% of the directors (excluding independent directors) are changing
- However, for an NBFC-P2P, an additional prior approval is required if any change in shareholding gives the acquirer the right to appoint a director
- It is not clear why this condition has been added specifically for NBFC-P2Ps
Question.4) Will the new prudential norms affect business?
- RBI has restricted the aggregate exposure (across all P2P platforms) of each lender and borrower to Rs10 lakh, and limited the exposure of a single lender to a single borrower to Rs50,000
- These conditions will severely restrict the business potential of NBFC-P2Ps, unless they are able to bring on many more borrowers and lenders onto the platform