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P2P Association Pauses Liquid Funds in India: What You Need to Know

29 Mar 2024 - Tushar
Reading time about 2 minutes

In a move that surprised many, a group representing peer-to-peer (P2P) lending platforms in India has decided to discontinue offering one very popular product.

P2P Lending These products worked like instant withdrawal products such as “liquid funds.”. P2P assocation has decided to discontinue such products. This decision, effective from April 1st, 2024, has sparked discussions about the future of P2P lending in the country.

Why the Change?

There are several possible reasons why the P2P association made this decision:

  • Regulatory Scrutiny: The Reserve Bank of India (RBI) has been increasingly scrutinizing P2P platforms, concerned about potential risks associated with these new-age financial institutions. Offering instant withdrawal options might raise concerns about liquidity mismatch, where borrowers’ repayments don’t align with investor withdrawals.
  • Focus on Core Business: P2P lending is fundamentally about connecting borrowers with lenders for specific loan purposes. Liquid funds might stray from this core model, potentially attracting risk-averse investors seeking high liquidity, which could conflict with the inherent nature of P2P loans (which typically have fixed repayment terms).
  • Managing Risk: P2P platforms might be aiming to mitigate potential risks by ensuring a better match between borrowers’ repayment schedules and investor expectations. Liquid funds could create a scenario where investors expect quick access to money, while underlying loans might have longer repayment terms.

What Does This Mean for Investors?

  • Limited Impact for Existing Investments: Investments already made in existing liquid funds are likely to continue operating as per their original terms until maturity. Investors should check with their chosen P2P platform for specific details.
  • Focus on Long-Term Returns: P2P investments are generally considered suitable for investors with a long-term horizon. This change might encourage investors to focus on traditional P2P offerings with fixed repayment terms, potentially offering higher returns compared to liquid fund options.
  • Explore Alternatives: Investors seeking high liquidity might want to consider other investment options like mutual funds or fixed deposits with shorter lock-in periods.

What’s Next for P2P Lending?

The P2P lending industry in India is still evolving. This move by the P2P association could be a sign of increased self-regulation and a focus on responsible lending practices. Here are some potential future trends:

  • Increased Regulatory Oversight: The RBI might continue to introduce stricter regulations to ensure the stability and safety of the P2P lending sector.
  • Focus on Innovation: P2P platforms might explore innovative ways to connect borrowers and lenders while managing risk effectively.
  • Improved Transparency: Enhanced transparency regarding loan terms, borrower creditworthiness, and potential risks could be crucial for building investor confidence.

The Bottom Line

The decision to stop offering liquid funds is a significant development for P2P lending in India. It’s too early to predict the long-term impact, but this move could potentially lead to a more mature and responsible P2P ecosystem that prioritizes investor protection and sustainable growth. Investors should stay informed about these changes and carefully evaluate their investment options before making any decisions.