P2P Lending is a new concept in debt financing. It enables a person to take a loan or invest money in lending, without any interactions whatsoever with a financial institution such as a bank.
Peer to Peer Lending Platform (P2P) is a non-banking institution which conducts its business activities through an electronic platform. Such P2P platforms have gained great popularity and proved to be a better option to raise funds in India due to the perks attached to it.
During recession in 2008 saw popularity of the P2P lending companies, both for borrowing and lending. As banks started to refuse increased loan portfolios, small businesses were on the lookout for resources, somewhere else.
P2P lending emerged as another way for the common people and the small businesses, to find themselves a credit lender- offering a higher rate of return on investments.
Keeping all this in mind, the Reserve Bank of India issued a Notification dated August 24, 2017 in terms of sub-clause (iii) of clause (f) of section 45I of the Reserve Bank of India Act, 1934.
This notification enumerates the Directions for compliance by every Non-Banking Financial Company that carries on the business of peer to peer lending after Peer to Peer lending registration.
These Directions are known as the Non-Banking Financial Company – Peer to Peer Lending Platform (Reserve Bank) Directions, 2017 and came into force with immediate effect.
This notification is an extensive statement that outlines in detail the various rules and regulations that all existing and prospective entities carrying on or intending to carry on the business of Peer-to-Peer (P2P) lending, commonly known as NBFC-P2P, will have to comply with.
The Master Directions thus provides a framework for the registration and operation of NBFC-P2Ps in India and some of the important disclosure, code and varied requirements to be followed by NBFC – P2P are mentioned below.
But, people are hesitant to use the platform, with the absence of a regulated environment. RBI has recently issued a notification to this effect in October 2017. All the NBFC-P2P Companies will comply to these directions from RBI.
In this article, we will highlight some of the impacts that the RBI notification will have in the P2P lending space:
Impact# 1: Framework on Registration
The P2P lending companies were so far recognized by the Companies Act. RBI issued directions on a framework on registration and operations of NBFC-P2P companies in India. RBI stipulates that the general character of the management of the company will not be prejudicial of public interest.
For this, RBI speaks about a Certificate of Registration (CoR) from RBI, that will be necessary to carry out the business of these NBFC-P2P companies, which will serve public interest. Peer to Peer Lending Registration can only be granted by RBI to those NBFC-P2P companies, who have a net owned fund of 20 million or any other higher amount, as specified by the bank.
Impact# 2: Prudential Requirements
The P2P platform must not expand indiscriminately. To keep a control on this, RBI has prescribed a leverage ratio not exceeding 2. Furthermore, lending practices are usually resorted by all those uninformed lenders, who seek higher returns only.
In other words, RBI has imposed a cap on the maximum contribution that the lender can make towards a loan. A single lender to the same borrower must not be exposed to an amount more than Rs 50,000 as stated by RBI. There is a cap of Rs 10,00,000, as the aggregate exposure of a lender to several borrowers, across all P2P companies and at the same point in time.
Impact# 3: Higher Quality of Credit
At present, the P2P lending companies do not have the resources that are available to the banks. So, the onus of credit-worthiness of the borrowers rested on them. It was not easy for the companies, which have taken Peer to Peer lending registration, to ascertain the quality of credit.
The reason behind this is that the credit bureaus do not have access to all the borrowers, across the length and breadth of the country. The result was higher delinquencies and fraud. So, when RBI acts as the supervisory body, they will have more details on disbursed loans and the accounts that dishonored them. This will raise the quality of credit.
Impact# 4: Legal Accountability
The lending companies so far were withholding information on their borrowers- the individuals and the businesses. The P2P lending platforms will now onwards submit reports on their financial positions, on a regular basis to the bank.
Moreover, there will be quarterly reports on loans as well as complaints, which were outstanding or those which got disposed of, during a quarterly period.
In extreme situations, when the company fails to be diligent in submitting the above reports, RBI may impose penalties or even take away the business license.
This regulatory regime of RBI has undoubtedly left a positive impact on the credibility to the P2P sector.
How Peer To Peer Lending Platforms Work?
Peer to Peer lending companies fall under the category of NBFC and hence, for functioning as one, they need NBFC Peer to Peer lending registration with the RBI.
Before seeking Peer to Peer lending registration it is essential to understand the nitty gritty of how these entities work:
- a) On a Peer to Peer lending platform it is the individual investors, i.e. the lenders, who are willing to lend their money to the borrowers on an agreed rate of interest, extend loans to the borrowers.
- b) It is not necessary to have any prior relationship between the lender and the borrower.
- c) Here the profiles of the borrowers are displayed and by browsing through these profiles the lenders are free to select and take a decision on who to lend money.
- d) On the P2P lending platform a proposed borrower may not necessarily receive full loan amount from an individual investor, he may get a part of it and the remaining amount of the desired loan may be given by other investors.
Thus, Peer to Peer (P2P) lending which is also known as cloud lending is a method to finance debt which enables individuals to lend and borrow money without the involvement of any official financial institution as an intermediary.
NBFC-P2P Pre-Registration Eligibility Requirement
Before applying for NBFC-P2P lending registration an entity must know about certain factors and be prepared for it:
- It must be a company incorporated in India
- The applicant must possess the necessary technological, entrepreneurial and managerial resources to get a NBFC Peer to Peer registration
- The applicant company must have adequate capital structure to carry the business as required by the RBI under Peer to Peer Lending Registration
- Before applying for NBFC Peer to Peer lending registration the company must ensure that the Directors are fit and proper
- Prior to applying for NBFC-P2P registration the applicant must have a plan submitted or implemented for efficient Information Technology System
- To ensure NBFC Peer to Peer Registration the applicant must submit a viable business plan
- The applicant must have the intent to serve in public interest
Eligibility Criteria For NBFC Peer To Peer Lending Registration
For NBFC Peer to Peer lending registration following is the list of things that must be obtained as per RBI:
- a) Every entrant looking to start P2P lending activities shall procure a certificate of NBFC-P2P Registration before working on operations.
- b) Every company wanting NBFC-P2P license from the RBI must have a net owned fund of not lesser than rupees twenty million, i.e., Rs 2 crore or a higher amount as specified by RBI.
- c) After receiving the applications for NBFC Peer to Peer registration, the RBI may verify and grant NBFC status for providing P2P lending.
- d) All P2Ps must avail Peer to Peer Lending Registration from the RBI as an NBFC.
- First step towards the NBFC-P2P Registration with the RBI is filling up of the application form available online on the bank’s site.
2) After duly filling the form, the company desirous of NBFC-P2P Registration, must submit the form along with all required documents.
3) Further, the applicant of Peer to Peer Lending Registration is required to send the physical form addressed to the Department of Non-Banking Regulation, Mumbai branch of the RBI.
4) The RBI verifies the other conditions of registration, submitted by the applicant of NBFC-P2P Registration, i.e. the required technological, managerial and entrepreneurial capabilities of the applicant to do the business of P2P Lending Platform.
5) After verification and satisfaction of necessary conditions and plan of business submitted by the company requesting NBFC-P2P registration, the RBI gives in-principle approval.
6) This in-principle approval of NBFC Peer to Peer lending registration by the RBI comes with a validity of 12 months for setting up of Peer to Peer Lending Platform and to put in place all required technologies to start with the Business of NBFC-P2P.
Scope of Activities of P2P Companies
The P2P lending platforms are the Fintech Companies registered under the Companies Act and those that have taken license after NBFC-P2P Registration with the RBI. These companies help in creating a match between lenders and borrowers.
After registering a borrower on its platform, the entity performs the task of the borrower’s credit assessment. The candidates who fulfill the due diligence test with the criteria laid down by the platform are allowed to take part in the borrowing and lending process.
All P2P platforms can also provide certain additional services such as credit assessment, risk analysis, recovery etc. Even the documentation for the lending and borrowing is facilitated by the online portal.
A company desirous of NBFC-P2P registration must take a close look at these factors:
- Act as an intermediary
- P2P lending platform is not permitted to lend on its own
- Not permitted to arrange credit enhancement/guarantee
- P2P lending platform do not possess the power to permit any secured lending
- Any other financial product cannot be sold
- International flow of funds cannot be permitted
- It is mandatory to adhere all applicable legal norms
Limitations on NBFC-P2P Platforms
Following norms, as per directives issued by the RBI, should be strictly adhered to by all NBFC-P2P who have already taken Peer to Peer lending registration, provisional or otherwise.
- Maintenance of Leverage Ratio (Outside Liabilities/ Net owned fund) must not exceed 2 crore.
- A Lender shall not lend in excess of Rs. 50 lakh at any point of time across all platforms to all its borrowers.
- A Lender investing more than Rs. 10 lakh across all platforms shall produce to P2P Platform a certificate of Net worth from Chartered Accountant certifying minimum Net worth.
- A borrower shall not borrow more than Rs. 10 lakh at any point of time across all platforms.
- A single lender to a single borrower shall not lend for amounts in excess of Rs. 50,000 across all platforms.
- The maturity period of loan linked to the platform shall not exceed 36 months.
Reasons For Growing Popularity of NBFC P2P Companies
P2P lending works very differently from other financing tools and borrowing from these is not from a financial institution but it is from an individual or group of individuals who are willing to loan money to applicants who are found qualified as per the criteria set by them.
The popularity of P2P lending platforms are growing day by day due to:
- a) Easy Loan Process
- b) Lower Cost of Borrowing
- c) Helping to fund Micro and Small Sized Enterprises
- d) Removal of offline Agents and Paperwork
- e) Direct negotiation between Lender and borrower
The interest rate may be set by the platform or by mutual agreement between the borrower and the lender. Fees are paid to the platform by both the lender as well as the borrower. The borrowers pay an origination fee (either a flat rate fee or as a percentage of the loan amount raised) according to their risk category.
The lenders, depending on the terms of the platform, have to pay an administration fee and an additional fee if they choose to use any additional service (e.g. legal advice etc.), which the platform may provide. NBFC Peer to Peer Registration with the RBI is a mandatory clause for incorporation of such entities.
We conclude, by saying that the regulatory regime of RBI will have a positive impact on the credibility to the P2P sector.
It was rightly said by Ralph Waldo Emerson– “Every Wall is a Door”
Thus, take a step forward to open the door for the new FDI norms.
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