Government of India has introduced a notification that intends to regulate all P2P lending platforms by Reserve Bank of India(RBI).
The executive director at RBI, Sudarshan Sen had said at a recent conference in Mumbai that the regulator was waiting for a gazetted notification from the Government of India. The notification will specify that the P2P loan platforms will fall under the purview of RBI’s regulation. In the report from the Press Trust of India, RBI wants the Government to issue a declaration – statingP2P platform as an entity that has to be regulated by the RBI.
The notification further gave P2P loan platforms a status of non-banking financial company (NBFC). This notification acts to set the right environment for the norms that will be released by RBI. These norms that are released will regulate P2P lending platform in India.
RBI has floated a consultation paper on the lending platform. Following are some insights that businesses may gather from the same:
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.
P2P lending platforms are regulated by the Reserve Bank of India (RBI). From October 2017, RBI made it mandatory for all such companies to have Peer to Peer lending registration in order to protect the interest of lenders and borrowers.
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.
Thus, we can say that P2P Lending is a type of crowd-funding for raising loans – one that can be paid back with interest. It uses an online platform for matching a lender and a borrower. All this is to avail unsecured loans.
2: Interest And Fees
Now coming to the interest rate – which is either fixed by the platform or it might be mutually agreed between the lenders and the borrowers. The borrower is either an individual or a legal person who requires a loan. The interest rate may be set by the platform or by mutual agreement between the borrower and the lender.
Furthermore, the lender and the borrower have to pay a fee to the platform. An origination fee is also paid by the borrower. This fee is charged as a flat rate or as a percentage of the loan amount raised. This is dependent upon the category of risk that is involved.
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. For all such functioning, NBFC Peer to Peer lending registration with the RBI is a mandatory clause for incorporation of such entities.
3: No Significant Value Attached
It is important to note that the benefits to the various stakeholders (borrowers, lenders and agencies) and the risks associated with this type of lending are significant and cannot be ignored any further. As of now, the concept of P2P lending is nascent in nature and yet to attain a significant value.
4: Disruption Caused
RBI favors P2P lending entities in the above consultation paper. RBI even finds potential in the above sector as it can disrupt the financial sector and is expected to throw up surprises.
5: Acts as an Alternate Lending Channel
An acknowledgment of this lending platform as an alternate lending channel is what RBI wants.
6: Official Recognition of the Platform
Through the notification mentioned above, RBI also states that a company that secures Peer to Peer lending registration will not only be officially recognized but also become useful not only to raise further fund-raising options but business expansion too.
7: Advantages of P2P Lending
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.
As the traditional form of finance is not always able to reach people at all places or on all occasions, P2P lending platforms have strongly come out as an effective alternate option.
There are quite a few advantages attached to P2P lending:
Higher returns to the Investors
The biggest advantage of lending platforms that have taken Peer to Peer lending registration, is the lower operational costs and higher levels of competition compared with the traditional types of lending channels.
P2P lending platforms are found to be profitable for both lenders and borrowers, not only do the investors can earn a higher return on investments but also, the borrowers are successful in availing loans at lower interest rates.
An investor stays well-informed about the borrower, loan agreement, loan originators, and therefore is able to develop several strategies for auto investment for loans and adjust the priorities as per the requirement. This provides the advantage to an investor as he could determine the risk and hence, gain greater interest on the loan offered.
The P2P lending platforms offer to the investors a huge variety of options to invest their capital in as to whatever way they want to. They can choose to offer small parts of a whole loan or they can fund an entire loan, but usually, most of the P2P investors opt to invest in portions.
Investors Make Choices
P2P lenders have an upper hand as they have the benefit of classifying the borrowers and ensure that they qualify identity verification. Moreover, they enjoy the freedom to invest only in the loans in which they are interested. Lenders choose to fund the borrowers that match their preferences. By availing the option to communicate directly with the borrowers, helps the P2P lenders to finalize the deals in a more effective way with the borrowers.
On P2P platforms, the investors have complete information regarding the background of the business, and it is easier to know where their money is going. The complete transparency that comes by the Peer to Peer lending registered companies is advantageous for all stakeholders.
Eligibility Criteria for Nbfc Peer to Peer Registration
For NBFC-P2P 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 Registration with the RBI must have a net owned fund of not lesser than rupees twenty million, i.e., Rs 2 crores 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. However, an existing NBFC will not be able to operate as an NBFC-P2P without Peer to Peer Lending Registration.
Like NBFC registration for all entities, all NBFC-P2P Companies should also be registered under the Companies Act, 2013 or in case of existing Company under previous Company Act.
For the NBFC incorporation of a prospective NBFC-P2P, the company is required to make an application for Peer to Peer lending registration to the Department of Non-Banking Regulation of the RBI.
No NBFC-P2P shall commence or carry on the business of a Peer to Peer Lending Platform without obtaining a Certificate of Registration (CoR) from the RBI. Thus, Peer to Peer lending registration is subject to a company fulfilling all the conditions specified by the RBI.
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 a Peer to Peer Lending Platform.
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.
An NBFC-P2P can act only as an intermediary that provides an online platform to the participants, that is, borrowers and lenders, involved in P2P lending. It must also ensure compliance to legal requirements applicable to the participants as mandated under relevant laws (including the KYC Directions prescribed by RBI). It is also required to store and process all data relating to its and its participants activities on hardware located within India.
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.
NBFC-P2P Registration Process
P2P (Peer to Peer) lending is a business model for loans that is 100% tech-driven and under this one can apply for a loan from individuals instead of applying for a loan from banks or financial institutions.
Every existing and prospective P2P needs to make an application for NBFC Peer to Peer lending registration to the RBI.
RBI releases guidelines from time to time to regulate the P2P lending platforms so that they can grow in a structured, fair and regulated manner. These guidelines apply on all companies opting for Peer to Peer Lending Registration and are the need of the hour in order to safeguard the interest of all lending platforms as well as lenders.
First step towards the NBFC-P2P Registration with the RBI is filling up of the application form available online on the bank’s site.
After duly filling the form, the company desirous of NBFC-P2P Registration, must submit the form along with all required documents.
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.
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.
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.
This in-principle approval of NBFC Peer to Peer 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.
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.
Thus, P2P lending platforms are the Fintech Companies registered under the Companies Act and those that have taken license after NBFC-P2P lending 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.
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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