Online lending: Chinese investors get second chance

By Santosh Pai and Vinu Peter Immanuel, Link Legal India Law Services
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India has growing internet penetration and a large unbanked population, but Chinese investors need to be wary of much tighter regulations when entering this market

The rapid boom and bust in China’s online lending market has caused many players to explore overseas markets. India shares some characteristics that make it an attractive market in this industry, such as growing internet penetration and a large unbanked population.

However, one major difference between China and India is the regulatory approach. China initially adopted a hands-off approach that allowed thousands of lending platforms to innovate, and started regulating the industry only when it reached
a critical mass.

Chinese investors
Santosh Pai
Partner
Link Legal India Law Services

In contrast, India made registration compulsory, issued conservative regulations at the outset, and tightly controlled the number of licences. After two years of nurturing this industry, India is now slowly liberalising it, thus giving Chinese investors a second chance to conquer a large market.

Non-banking finance companies (NBFCs) have a long history in India, and are regulated by the Reserve Bank of India (RBI). Historically they have been restricted to capital-intensive sectors such as real estate and infrastructure, or consumer loans for homes and automobiles.

Fintech companies that harness unconventional datasets differentiate themselves by serving new categories of customers, making better-quality credit decisions and improving user experience.

Online lending platforms especially in the peer to peer (P2P) segment empower individuals to take credit decisions which otherwise only a bank or financial institution could have taken, thus allowing them to scale up faster. This ability to scale up fast without building a physical network of branches makes such companies attractive to venture capital investors.

Chinese investors
Vinu Peter Immanuel
Associate Partner
Link Legal India Law Services

India currently has only 20 P2P lending platforms, and another 30 technology companies that act as intermediaries between various categories of lenders and borrowers. The RBI, which regulates NBFCs, recently acknowledged that, “although nascent in India, and not significant in value yet, the potential benefits that P2P lending promises to various stakeholders (the borrowers, lenders, agencies and others) and its associated risks to the financial system are too important to be ignored”.

This message has three key takeaways: (1) the Indian government has recognised the importance of online lending; (2) it will support the industry; and (3) this industry will always be tightly regulated.

The RBI issues more than a dozen types of NBFC licences, but the two most relevant types for online lending are Investment and Credit Company (ICC) licences and P2P lending licences. The ICC is defined as “a financial institution carrying on as its principal business – asset finance, the providing of finance, whether by making loans or advances, or otherwise for any activity other than its own, and acquisition of securities”.

The NBFC Peer to Peer Lending Platform (Reserve Bank) Directions (2017) provide for registration and regulation of P2P licence holders. Both categories of licences are subject to a minimum capital requirement of ₹20 million (US$271,000).

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