P2P Lending – Concept and Regulations

On 4th October, 2017, RBI came up with Master Directions to govern Non-Banking Financial Company – Peer to Peer Lending Platform. However, before understanding these guidelines has to say, let us understand the concept of “P2P Lending” with which many of us are unaware.

In simple terms, P2P lending is a Flipkart or an Amazon for Borrowers and Lenders/Investors. It is a marketplace that provides common meeting platform to lenders/investors (majorly individuals, that is, non-institutional) and borrowers (individuals or businesses). There are several P2P lending platforms in India such as Faircent, Lendbox, Peerlend, iLend, etc. eyeing at huge untapped market.

The concept of Peer-to-Peer lending enables an individual with surplus funds to lend money to other individuals and businesses at interest rates higher than deposits or debentures. Whereas borrowers benefit because they are able to source small amount of money quickly at interest rates lower than banks. The P2P lending platform assists these participants by discharging associated functions such as analysis of creditworthiness of borrowers, executing and maintaining legal documentations, recovery of loans, etc. in exchange of fees.

In order to regulate the companies providing Peer-to-Peer lending platform, the Reserve Bank of India issued master directions according to which companies providing such platform will have to be registered as Non-Banking Financial Companies (NBFC) and will be classified as NBFC-P2P.

Certain noteworthy points of Master Directions are as below:

1. The directions are with effect from 4th October, 2017

2. Registration required to be obtained from RBI to operate as P2P lending platform. Application for registration to be made at Mumbai.

3. Existing companies need to obtain registration within 3 months

4. Minimum net owned fund of Rs. 2 crores is required to operate as NBFC-P2P

5. NBFC-P2P can neither raise deposits nor can it lend on its own

6. They are not permitted to cross-sell any product except loan specific insurance products.

7. NBFC-P2P is required to carry out due diligence of participants

8. They are required to maintain leverage ratio of less than or equal to 2

9. No lender/investor can lend more that Rs. 10 Lakh, across all P2Ps. This is to ensure that exposure of single investor is limited and High Net-worth Individuals do not become new-age “moneylenders” replacing need of banks.

10. No borrower can borrow more than Rs. 10 Lakh, across all P2Ps.

11. The exposure of a single lender to the same borrower, across all P2Ps, shall not exceed 50,000/-

12. Fund transfer between participants shall be through Escrow account mechanism

13. Lender should be disclosed borrower’s personal identity, credit score, etc.

14. Borrower should not be furnished with personal identity and contact details of lender.

15. NBFC-P2P shall execute proper agreements with participants disclosing all terms & conditions among borrower, lender and NBFC-P2P.

16. NBFC-P2P will have to ensure that their staff should not harass or coerce borrower for recovery of loan.

17. They should have Grievance Redressal in place

18. NBFC-P2P must build robust Information Technology Framework, ensure Data Security and develop Business Continuity Plan

19. Information System Audit of the internal systems and processes shall be conducted at least once in two years by CISA certified auditors.

20. Material change in ownership or change in management is required to be approved by RBI

21. NBFC-P2P will have to furnish various statements to RBI on quarterly basis.

The RBI directions on operating of P2P lending platform has provided sense of recognition to this budding industry which aims to enable individuals and small businesses to raise funds from other individuals.

Disclaimer: This article is for the purpose of general awareness and does not represent professional opinion of the author.

Authored by Keval Mamania, Chartered Accountant

Contact: ersteadvisory@gmail.com