RBI, Master Directions – 2017 – NBFC – Peer to Peer Lending Platform – exciting technological innovation
Anxiously awaited, RBI directions on peer to peer lending platform was issued on October 4, 2017 and let us understand it from a layman’s point of view. It is essential to view the directions as issued by RBI which will help many entrepreneurs to venture into new areas for prosperity and to meet new challenges of technology. For obvious reasons, the relative website is being quoted for reference and which will be quoted frequently for discussion.
Reserve Bank of India (RBI) in terms of RBI Act of 1934, issued directions on “Non-Banking Financial Company – Peer to Peer Lending Platform (Reserve Bank) Directions, 2017”. Detailed information is being given below for discussion. Most of them being simple in nature, are reproduced directly and if necessary, carry small explanation.
“Eligibility Criteria
(I) No non-banking institution other than a company shall undertake the business of Peer to Peer Lending Platform.
(ii) No NBFC-P2P shall commence or carry on the business of a Peer to Peer Lending Platform without obtaining a Certificate of Registration (hereinafter referred to as “CoR”) from the Bank. Provided that an entity carrying on the business of a Peer-to-Peer Lending Platform as on the effective date of these directions, can continue to do so, subject to the conditions laid down in sub-paragraph (2)(vii) in this Paragraph.
(iii) Every company seeking registration with the Bank as an NBFC-P2P shall have a net owned fund of not less than rupees twenty million or such higher amount as the Bank may specify.
(2) Process of Registration
(i) Every existing and prospective NBFC-P2P shall make an application for registration to the Department of Non-Banking Regulation, Mumbai of the Bank, in the form which will be specified by the Bank for the purpose. Existing NBFC-P2Ps shall apply within three months from the issuance of these Directions.
(ii) The Bank, for the purpose of considering the application for registration, shall require the following conditions, among others, to be fulfilled:
a. The company is incorporated in India;
b. The company has the necessary technological, entrepreneurial and managerial resources to offer such services to the participants;
c. The company has the adequate capital structure to undertake the business of Peer to Peer Lending Platform;
d. The promoters and the Directors of the company are fit and proper;
e. The general character of the management of the company is not prejudicial to the public interest;
f. The company has submitted a plan for, or implemented, a robust and secure Information Technology system;
g. The company has submitted a viable business plan for conducting the business of Peer to Peer Lending Platform;
h. Public interest shall be served by the grant of CoR;
i. Any other condition as may be specified by the Bank, fulfillment of which, in the opinion of the Bank, is necessary to ensure that the commencement of or carrying on the business in India shall not be prejudicial to the public interest.”
It is very clear that fly by night financing companies which flourished in many states like Orissa, West Bengal, Telangana, Maharashtra, Tamil Nadu or Andhra Pradesh would cease to exist if the above directions are to be observed.
To the simple question as to what would happen to the existing companies who have been carrying on the above business, clear and very simple conditions have laid down as given below:
“In case of existing NBFC-P2Ps
(vii) Companies that are undertaking the business of Peer to Peer Lending Platform, as defined at paragraph 4(1)(v) of these directions, as on the date of effect of these directions, shall apply for registration as an NBFC-P2P to the Bank within 3 months from that date. Such companies, which have applied to the Bank for registration as an NBFC – P2P, shall be permitted to continue the business of a Peer to Peer Lending Platform till their application for issuance of CoR is rejected, subject to such conditions, including winding down of business, as the Reserve Bank may impose.
(viii) The Bank may cancel the COR granted to an NBFC-P2P, if such company –
a. ceases to carry on the business of Peer to Peer Lending Platform in India; or
b. has failed to comply with any condition subject to which the COR has been issued to it; or
c. is no longer eligible to hold the COR; or
d. at any time fails to fulfill any of the conditions referred to in paragraphs 5(2)(ii) and 5(2)(v); or
e. fails to –
(i) comply with any Direction issued by the Bank; or
(ii) maintain accounts, publish and disclose its financial position in accordance with the requirements of any law or any Direction or order issued by the Bank; or
(iii) submit or offer for inspection its books of account or other relevant documents when so demanded by the Bank.”
What are scope of activities which are the basis of their existence. Again quoting from those directions, one gets the answer:
“6. Scope of Activities
(1) An NBFC-P2P shall-
i. act as an intermediary providing an online marketplace or platform to the participants involved in Peer to Peer lending;
ii. not raise deposits as defined by or under Section 45I(bb) of the Act or the Companies Act, 2013;
iii. not lend on its own;
iv. not provide or arrange any credit enhancement or credit guarantee;
v. not facilitate or permit any secured lending linked to its platform; i.e. only clean loans will be permitted;
vi. not hold, on its own balance sheet, funds received from lenders for lending, or funds received from borrowers for servicing loans; or such funds as stipulated in paragraph 9;
vii. not cross sell any product except for loan specific insurance products;
viii. not permit international flow of funds;
ix. ensure adherence to legal requirements applicable to the participants as prescribed under relevant laws.
x. store and process all data relating to its activities and participants on hardware located within India.
(2) Further, NBFC-P2P shall-
i. undertake due diligence on the participants;
ii. undertake credit assessment and risk profiling of the borrowers and disclose the same to their prospective lenders;
iii. require prior and explicit consent of the participant to access its credit information;
iv. undertake documentation of loan agreements and other related documents;
v. provide assistance in disbursement and repayments of loan amount;
vi. render services for recovery of loans originated on the platform.
Other information like prudential norms, operational guidelines, fund transfer mechanism, submission of data to Credit Information Companies and transparency and disclosure requirements have also been culled out of the RBI directions for clear perception.
“7. Prudential Norms
(1) NBFC-P2P shall maintain a Leverage Ratio not exceeding 2.
(2) The aggregate exposure of a lender to all borrowers at any point of time, across all P2Ps, shall be subject to a cap of₹ 10,00,000/-.
(3) The aggregate loans taken by a borrower at any point of time, across all P2Ps, shall be subject to a cap of₹ 10,00,000/-.
(4) The exposure of a single lender to the same borrower, across all P2Ps, shall not exceed₹ 50,000/-.
(5) The maturity of the loans shall not exceed 36 months.
(6) P2Ps shall obtain a certificate from the borrower or lender, as applicable, that the limits prescribed above are being adhered to.
8. Operational Guidelines
(1) NBFC-P2P shall have a Board approved policy in place –
i. Setting out the eligibility criteria for participants on it.
ii. Determining the pricing of services provided by it.
iii. Setting out the rules for matching lenders with borrowers in an equitable and non-discriminatory manner.
(2) The outsourcing of any activity by NBFC-P2P does not diminish its obligations and it shall be responsible for the actions of its service providers including recovery agents and the confidentiality of information pertaining to the participant that is available with the service providers.
(3) No loan shall be disbursed unless the individual lender/s have approved the individual recipient/s of the loan and all concerned participants have signed the loan contract.
9. Fund Transfer Mechanism
Fund transfer between the participants on the Peer to Peer Lending Platform shall be through escrow account mechanisms which will be operated by a trustee. At least two escrow accounts, one for funds received from lenders and pending disbursal, and the other for collections from borrowers, shall be maintained. The trustee shall mandatorily be promoted by the bank maintaining the escrow accounts. All fund transfers shall be through and from bank accounts and cash transaction is strictly prohibited. The mechanism as described in the Annex-I may be adopted by the NBFC-P2P.
10. Submission of data to Credit Information Companies (CICs)
(1) An NBFC-P2P shall become member of all CICs and submit data (including historical data) to them.
(2) NBFC-P2P shall:
(i) 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;
(ii) take all such steps which may be necessary to ensure that the credit information furnished by it is up to date, accurate and complete;
(iii) include necessary consents in the agreement with the participants for providing the required credit information;
11. Transparency and Disclosure Requirements
(1) An NBFC-P2P shall be required to disclose the following:
(i) to the lender
a. details about the borrower/s including personal identity, required amount, interest rate sought and credit score as arrived by the NBFC-P2P.
b. details about all the terms and conditions of the loan, including likely return, fees and taxes;
(ii) to the borrower – details about the lender/s including proposed amount, interest rate offered but excluding personal identity and contact details;
(iii) publicly disclose on its website:
a. overview of credit assessment/score methodology and factors considered;
b. disclosures on usage/protection of data;
c. grievance redressal mechanism;
d. portfolio performance including share of non-performing assets on a monthly basis and segregation by age; and
e. its broad business models.
(2) NBFC-P2P shall ensure that the providing of services to a participant, who has applied for availing of such services, is backed by appropriate agreements between the participants and the NBFC-P2P. The agreements shall categorically specify all the terms and conditions among the borrower, the lender and the NBFC-P2P.
(3) The interest rates displayed on the platform shall be in Annualized Percentage Rate (APR) format.”
Other information on participants grievance redressal, information technology framework, Data security and business continuity plan, fit and proper criteria, and requirements to obtain proper approval of the Bank for allotment of shares, acquisition or transfer of control of NBFC-P2P, application for prior approval, public notice about change in control/management, information about of change of address, directors, auditors etc. have been amply given by RBI in its directive communication.
Under reporting requirements, the following returns have been expected from NBFC-P2P companies:
“(1) The Bank may, from time to time, prescribe return/s to be submitted by NBFC-P2P, as it deems fit.
(2) The following quarterly statements shall be submitted to the aforesaid Regional Office within 15 days after the quarter to which these relate.
(i) A statement, showing the number and amount in respect of loans;
a. disbursed during the quarter;
b. closed during the quarter; and
c. outstanding at the beginning and at the end of the quarter, including the number of lenders and borrowers outstanding as at the end of the quarter
(ii) The amount of funds held in the Escrow Account, bifurcated into funds received from lenders and funds received from borrowers, with credit and debit summations for the quarter.
(iii) Number of complaints outstanding at beginning and at end of quarter, and disposed of during the quarter, bifurcated as received from
a. lenders and
b. borrowers.
(iv) The Leverage Ratio, with details of its numerator and denominator.”
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Annexure 1 contains funds transfer mechanism with diagrammatic explanation.
Annexure 2, titled “Fit and Proper criteria for directors of NBFC P2P with information ranging a-g,
Annexure 3 titled “Declaration and Undertaking by Director {with appropriate enclosures as on} with columns 1-6 and
Annexure 4 with title “Form of deed of conversant with a director with columns (1-9) complete the directions from RBI.
Conclusion
To the fermented mind, why to read the directions of RBI on NBFCP2P, the answer is very clear with the message that a lot of ground work needs to be done to float the said company and if already existing, the new requirements have to be adopted. RBI repeatedly makes it operational requirement that a very sincere attempt needs to be made to evolve a suitable business model based on wide range of information given by RBI which will ensure stability, continuity and growth of NBFCP2P, a sector which has seen disastrous performance with virtual zero governance and supervision from state/central governments. Let us applaud RBI for its professional job and leadership qualities.
Yes, it is lot of reading but unavoidable in a professional world.
Author Bio
Great to know that the RBI now supports Peer-to-Peer lending. It is a great business model and is here to stay. I have tried investing through a P2P lending platform and based on my experience, P2P lending is a great addition to your investment portfolio. Great returns coupled with no market volatility, what more can you ask for?