The Reserve Bank of India (RBI) has introduced stringent new guidelines to address malpractices in the peer-to-peer (P2P) lending sector and protect investor interests. Effective immediately, these regulations prohibit P2P platforms from assuming credit risks, offering credit enhancements, or providing guarantees. Under the new rules, lenders must bear the full risk of any potential loss of principal, interest, or both.
The RBI’s decision is a response to instances where P2P platforms have violated existing norms by bypassing traditional banking channels to connect individual lenders directly with borrowers. In a bid to enhance transparency and consumer protection, the new framework also restricts these platforms from cross-selling insurance products related to credit enhancements or guarantees. Moreover, P2P platforms are now barred from marketing their services as investment products and must clearly disclose all potential risks that lenders might face concerning principal and interest.
“The entire loss of principal or interest or both, if any, in respect of funds lent will be borne by the lenders,” the RBI emphasized in its statement. This move is part of the central bank’s broader effort to tighten scrutiny of the rapidly expanding consumer finance sector, particularly P2P lending, to mitigate systemic risks and ensure a safer financial environment.
Additionally, the new guidelines mandate that P2P platforms cannot use lender funds to cover the obligations of other lenders, promoting a more transparent and responsible operational model. This regulatory overhaul underscores the RBI’s commitment to fostering a stable and secure financial ecosystem within the FinTech sector.
