An operating licence from the regulator is always regarded highly in the financial services industry. In 2017, when the Reserve Bank of India first spoke about recognising peer-to-peer lending as a sector — P2P lenders link borrowers and lenders online, collecting a commission from both parties — there was much euphoria in the market.

Back in 2017, P2P lending was taking financial markets by storm globally, with the promise of driving financial inclusion and bringing interest rates down. The bet was that in a decentralised world, financial transactions would become peer to peer, and that would revolutionise even the credit business, which had hitherto been concentrated in the hands of a few large banks.

From US-based LendingClub, which got valued at $8.5 billion on its listing day back in 2014 to Chinese P2P lenders, who even in 2017-18 were disbursing $150 billion collated from 50 million investors, the sector saw a massive boom. 

But the euphoria was shortlived. Globally, there was a massive crackdown on the sector. In India, restrictive regulatory policies were introduced by the banking regulator in 2017 to keep the players in check. These included strict capital requirements, restrictions on disbursals, and keeping the business strictly retail. Bottomline, P2P as a sector lost its sheen.

Today, most of India’s 25 licensed P2P lenders are stuck in the slow lane. Players such as iLend, Peerlend and many others have either changed ownership or are seeking a buyer. Only a handful, such as LenDenClub, Faircent and LiquiLoans, have managed to raise major venture money and scaled up to a certain level. And they, too, have had to partner with consumer-facing startups such as Cred and BharatPe to get access to borrowers and lenders.

All of this raises a critical question: in a credit starved country, why has P2P lending as a sector failed to take off? And of those who survived, why are most having to push the regulatory envelope by building partnerships with digital direct selling agents (DSAs) and entering into some sort of FLDG (first loan default guarantee) arrangements?