A good percentage of people in the world are involved in digitally enabled peer-to-peer exchange. This form of exchange has expanded dramatically in recent years, moving beyond simple retailing and free file exchange to personal, human-intensive services such as hosted accommodation, urban and city-to-city transportation, and peer-to-peer lending.
Such exchange blurs the line between personal and professional in the provision of commercial services. Further, it often involves semi-anonymous transactions. Each of these factors creates a variety of regulatory challenges that could impede innovation, especially the basic innovation made possible by new opportunities for peer-to-peer exchange that could have great positive consequences in how people interact with one another and put on a common grid the shared services, thereby creating synergy in how the resources are utilised at their optimum level. Some of these challenges must include self-regulatory approaches. Self-regulation is a naturally occurring phenomenon that has emerged repeatedly throughout the history of economic activity. Recent research results suggest that the economic activity on these platforms may benefit below-median-income consumers more than above-median-income consumers.
Self-regulation is very important for Peer-to-Peer lending platforms. RBI’s initiatives to establish regulatory framework for India’s peer-to-peer (P2P) lending domain is expected to add to the long-term sustainability of the sector. RBI’s consultation paper highlights the intermediary nature of P2P and ensures their “skin in the game”.
I want to quote China Banking Regulatory Commission (CBRC) draft rules for online lending and list out some of the activities that should be forbidden to make P2P lending long sustaining and successful.
- Using the platform for self-financing or for financing of related parties
- Strict know your customer (“KYC”) checks to support anti-money laundering
- Directly or indirectly accepting and managing lender funds
- Providing guarantees to lenders or promising guaranteed returns on principal and interest
- Marketing or recommending loan investments to users that have not completed identification verification after registering on the platform
- Directly making loans to borrowers, unless stated otherwise by applicable laws and regulations
- Structuring loans into investment products with liquidity timing that differs from the original loan term
- Providing false loan information or create unrealistic return expectations
- Facilitating loans for the purpose of making investments in the stock market
- Restrict platforms from collecting investments from lenders offline in cash
- Platforms should not be allowed to make investment decisions for lenders. Each individual investment- or loan-funding decision must be made directly and confirmed by the lender.
Here are some of the practices that the Platforms should follow to self-regulate themselves and provide transparency in their operations.
- Platforms should register with local financial regulators after obtaining appropriate business licenses, even though registration does not constitute an evaluation or approval of the platform’s operations. RBI’s move to provide NBFC licenses to the P2P platforms helps to make this happen.
- Platforms should report the loan performance to the credit bureaus. This is a win-win for all the stakeholders in the ecosystem including borrowers who can take smaller loans and build a good credit score.
- Platforms should conduct annual third-party audits and submit the audit report to local regulators within few months of their fiscal year-end.
Here are some disclosures by the borrowers to the platform and the platform to the lenders that are required as part of best practises.
- Basic borrower information: annual income and expenses
- Loan information: loan type, loan purpose, borrower location, application documents, source of repayment, loan amount, term, interest, credit rating or score
- Platform loan statistics: total transaction amount, transaction count, borrower concentration, delinquent loan amount, delinquency rate, lender count, borrower count, customer complaints, loss compensation for investors (insurance)
Making judicious choices about data transparency is truly critical. A progressive approach can have significant long-term benefits. One might imagine a variety of societal goals being achieved in part by the platforms applying machine-learning techniques to their data to detect patterns corresponding to, say, discriminatory practices, much like credit card issuers use automated systems to detect criminal fraud. This approach of regulatory delegation can yield far more expansive regulating-through-data alternatives than are feasible with complete transparency, and it suggests promising opportunities for self-regulation.
Please visit PeerLend.in to learn about Peer-to-Peer lending.