What is P2P Lending – A new genre of NBFCs By CS Shweta Dubey


In April 2016, RBI (“the Bank”) released the consultation paper proposing the regulatory norms for Peer-to-Peer (P2P) lending platforms. Recently on 24th August, 2017; RBI specified them as a form of Non Banking Financial Institutions by emphasising on the fact that apart from the easy access that they offer, P2P platforms can also bring down interest rates in comparison to the informal sector, and the positive aspects which makes P2P lending is one such business model that has gathered momentum globally and is taking roots in India, the Bank said in its consultation paper.

Concept of NBFC:

A Non-Banking Financial Company (NBFC) is a company registered under the Companies Act, 1956/2013 which is engaged in the business of loans and advances, acquisition of shares/ stocks/ bonds/ debentures/ securities or other marketable securities of a like nature which includes leasing, hire-purchase, insurance business, chit business but does not include any institution whose principal business is that of agriculture/industrial activities etc.

A Glance on P2P lending :

P2P lending is the practice of lending money to individuals or businesses via online services that matches potential borrowers to that of potential lenders. Both Buyers and Sellers need to get registered themselves on the platform. P2P lending is a form of crowd-funding used to raise loans which are paid back with interest.

'Crowd Funding' generally refers to a method of funding a project or venture through small amounts of money raised from a large number of people. The P2P platforms do not lend their own funds but act as facilitators to both the loan seeker and loan giver.

Previously there was no such mandatory compliances for the P2P online intermediaries but now RBI has issued the Master Directions  on 4th Oct 2017 for Compliances of the same for the NBFCs that carries on the business of a Peer to Peer Lending Platform.

As of Now, No NBFC can commence or carry on the business of a Peer to Peer Lending Platform without obtaining a Certificate of Registration from RBI.

What to do in the case of existing entities engaged in the said business of P2P Lending Platform?

As on the effective date of these directions, they can continue to do so, subject to the conditions as mentioned in the master directions in sub-paragraph (2)(vii) in this Paragraph.

Why RBI came up with the Master Directions:

Basically, P2P lendings are the unsecured ones and often referred to as crowd lending. And to make it more secure and nascent, RBI came up with this regulatory norms.
 
Glimpses of the Master Directions issued by RBI:

  1. Registration time frame for the Companies:-
It has been mandated for the existing P2P lending companies to get themselves register within 3 months and such companies who already have applied for the same can carry on their business till their application for issuance of CoR is rejected, due to lack of fulfillment of conditions mentioned in the master circular.

  1. Maintenance of Minimum Net Owned Funds(NOF) and other Prudential Norms for the P2P NBFCs:
Minimum NOF to be maintained by the NBFCs which intends to carry on P2P business is 20 Millions (INR 2 Crores). The prudential norms as instructed by RBI to NBFCs:
  • For maintaining a Leverage Ratio (i.e. outside liabilities) should not exceed twice.
  • Limit of lending for per lender INR 10,00,000/-.
  • Similarly, a borrower cannot take loans in aggregate at any point of time, across all P2Ps, exceeding INR 10,00,000/-.and the exposure of a single lender to the same borrower, across all P2Ps, shall not exceed INR 50,000/-.
  • The maturity of the loans shall not exceed 36 months.
  1. NBFIs which can carry on the business of P2P Lending?
The lending platforms should be companies registered under the Companies Act can only act as an aggregator for lenders and borrowers.

  1. Scope of Activities:
A list of scope of activities has been outlined by the Bank for the P2P NBFCs, out of which few of them are:-

DOs

Don’ts

Shall act only as an intermediary providing an online marketplace or platform

Cannot raise deposits u/s Section 45I(bb) of the Act or the Companies Act, 2013;

Shall undertake due diligence on the participants to secure the lenders.

Cannot lend on its own or not provide or arrange any credit enhancement or credit guarantee

require prior and explicit consent of the participant to access its credit information and proper documentation with respect to loan like loan agreements etc. should be maintained.

cannot permit international flow of funds and cannot facilitate or permit any secured lending linked to its platform; i.e. only clean loans will be permitted.

The NBFC now needs to undertake credit assessment and risk profiling of the borrowers and disclosure of the same to the lenders for lowering the risk of defaults and to maintain the transparency between the lender and the borrower.

cannot cross-sell any product except for loan specific insurance products

 

Can only provide assistance for disbursement and repayments of loans.

cannot hold, on its own balance sheet, funds received from lenders for lending, or funds received from borrowers for servicing loans; or such funds


5. Use of Escrow Account:


RBI in its notification mandates the use of escrow accounts for both the lenders and the borrowers which shall be operated by a trustee and the fund transfer mechanism so that the threat of money laundering can be removed. Further the use of cash is totally debarred in the transactions. The trustee shall mandatorily be promoted by the bank maintaining the escrow accounts.


6. Transparency and Disclosure Requirements:

The Bank now makes it mandatory for the lenders and borrowers a number of disclosures, so that adequate transparency shall be maintained from both ends to maintain a two way translucency and the Company is directed to preserve the supporting documents with regard to any loans.

The disclosures required are as follows:


Details about the borrower personal identity, required amount, interest rate sought and credit score as arrived by the NBFC-P2P, terms and conditions, interest rate of the loan to the lender.

Details about the lender/s including proposed amount, interest rate offered but excluding personal identity and contact details to the borrower.

To disclose on the public website grievance redressal mechanism, overview of credit assessment/score methodology and factors considered, disclosures on usage/protection of data, grievance redressal mechanism, its business model etc.
The interest rates displayed on the platform shall be in Annualized Percentage Rate (APR) format.

7. Board framed policies:

The NBFCs are now required to frame a number of policies framed by its Board of Directors for more security and more security for the lender’s money:

Fit and Proper criteria for the Board of Directors have been mentioned in the Master Direction issued by the Bank and all the directors of the NBFCs should meet the formed standard criteria.
Board approved policy to address participant grievances/complaints to maintain the grievances of the stakeholders and redress them within a time period of maximum one month.
Fair Practices code for the various stakeholders covering the general guidelines for recovery of loans, taking explicit affirmation from the lender about the risk assigned before concluding the proposed transaction.

8. Submitting data to CICs:

A more step by the Bank to prevent the money of the lenders is that now every P2P NBFC shall become a member of Credit Information Corporations (CICs) and shall:

a) To keep the credit information (relating to borrower transactions on the platform) maintained by it, updated regularly on a monthly basis or at such shorter intervals as may be mutually agreed upon between the NBFC-P2P and the CICs;

b) To take all such steps which may be necessary to ensure that the credit information furnished by it is up to date, accurate and complete;
To include necessary consents in the agreement with the participants for providing the required credit information.

At the end it can be said that by imposing the regulations made the path for the P2P NBFCs a bit challenging to sustain, levying multiple restrictions on it but the potential benefits it is rendering to the economy and the massive growth of the industry by making the P2P platform secured, complied and transparent is P2P lending platforms attract higher investments, boost expansion efforts, as well as drive product and tech innovations. 

Notifications are annexed for ready reference:-

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