According to four sources with firsthand knowledge of the situation, India's central bank has directed peer-to-peer lending platforms to suspend some activity after inspections revealed rule infractions and misleading sales practices. According to the individuals, all of whom are industry executives, the Reserve Bank of India, the country's banking regulator, inspected at least ten lenders in the fast-growing sector between June and September. They did not want to be identified because discussions with the regulator are not open to the public.

They went on to say that certain lenders had already begun to discontinue some services and practices in accordance with the central bank's guidelines, and that failing to comply could result in future penalties or limitations.  A request for comment was not returned by the Reserve Bank of India. aThe six largest lending platforms, out of the 24 that conduct business in India, did not answer either. 

According to the sources, regulators discovered a number of infractions and suspicious practices, including improper relending of recovered funds and marketing of goods as an alternative to bank deposits. India's regulators have increased their monitoring of quickly rising consumer financing businesses, such as peer-to-peer lending, which industry leaders estimate has assets under management between 80 billion to 100 billion rupees ($960 million-$1.20 billion).  

Regulators have increased capital requirements for lenders, including non-bank financial businesses, in relation to the personal loans they make.

According to a Future Market Insight analysis, peer-to-peer lending, which bypasses banks and financial institutions by connecting individual lenders with borrowers, grew to $407 billion globally last year. However, other nations, like China and Indonesia, have recently restricted the platforms' activity in response to large-scale defaults and consumer complaints.  

According to one of the individuals, regulatory inspections discovered that some Indian peer-to-peer lenders were raising their transaction volumes by inappropriately permitting other financial institutions to lend through their platforms. 

According to the source, a senior executive at a peer-to-peer lender, the central bank instructed lenders to stop marketing their platforms as an alternative to bank deposits, which regulators felt was mis-selling. "RBI has categorically told us not to compare the product with savings or fixed deposits," a source familiar with the matter said.  

According to the four sources, some lenders were also automatically re borrowing money repaid by borrowers without proper authorization from the lender, which is also a violation of banking regulations.  

"There have been instances where P2P lenders did not act in the spirit of the P2P lending guidelines, where the platform is only supposed to act as a marketplace," said Rohan Lakhaiyar, partner in Grant Thornton Bharat's financial services risk division.