“Anyone who is not investing now is missing a tremendous opportunity.”
If you are looking to set up your peer to peer lending NBFC in India and are not sure about how to proceed with the process of peer to peer lending registration or getting the peer to peer lending license, then this piece has all the important info you need. This blog will give you the answer to questions like,
How does Peer to Peer (P2P) lending works in India?
How to start the peer to peer lending registration process and get the peer to peer lending license?
What are the advantages of P2P lending NBFCs in Indian financial market?
Once you know the answers to the above questions, you will be clear about establishing your own P2P lending NBFC in India to take advantage of the huge financial market and its limitless opportunities. We will also tell you the advantages of investing in P2P NBFCs and how we help new companies to register with Reserve Bank of India as a new peer to peer NBFC. Now let us start with how peer to peer lending NBFC works.
Peer to Peer Lending Process in India
P2P lending companies or NBFCs provide loans to borrowers at lower interest rates compared to banks or traditional financial institutions. These have become a useful tool for small business who have been rejected by banks for loans or any other person in immediate need of funds but won’t get it from their bank. The interest rates are comparatively lower in these NBFCs to banks and the process of getting the loan is usually online. However, most of the times, the amount you can apply for the loan is lower compared to the banks or other major financial institutions. The obvious question that comes to the mind is that how P2P NBFCs give loans at lower interests and yet give higher returns to the investor? Let’s understand it with the following example:
“Suppose A has more savings than his expanses and he decide to invest the amount in a savings account (could be a fixed deposit as well) in a bank. Also, B requires a loan of nearly the same amount that A is ready to invest in the bank. Now, a bank offers an interest of 4 per cent P.A. to the investor (maybe 7 per cent P.A. in case of a fixed deposit) and gives loan to B at the rate of 10 per cent P.A. The difference in these interest rates is the profit of the bank which comes useful in running operations of the bank. P2P lending NBFC removes the bank as the mediator and lets the investor A meet the borrower B directly. In this case, A can lend money to B at the rate of 8 per cent P.A. and can make more returns on investment whereas B gets the loan at 2 per cent lesser interest rate. This becomes a win-win situation for both the borrower and the investor. “
The above case is a classic example of how P2P lending works. If you have a large sum of money to invest or you have a set of investors ready to invest money in P2P lending, then you can simply register as a P2P lending NBFC and meet the borrower directly to start the process. The returns on investment, in this case, are the EMIs submitted by the borrower monthly.
General Characteristics of P2P NBFCs
- The transactions are mostly online and have a shorter turnaround time compared to banks.
- It is not necessary for a lender and a buyer to be in a prior business partnership before starting the lending process.
- The P2P NBFCs are a platform that brings lenders and borrowers together to match the demand and supply of finance between them. Hence, the interest rates for a deal with the borrower could be decided by the lender or the online platform itself. In case the interest rates are fixed by lenders, the NBFC can make its earning by charging some fee from the lender and the borrower.
- The fee paid by the borrower to NBFC could be at a common flat rate or some percentage of the loan amount. The lender must pay a definitive administrative charge to the NBFC which could be at a fixed rate.
- If the NBFC is the lender itself then these charges could be levied, and the borrower must pay only the principal along with interest to the NBFC.
- These platforms facilitate fast loan approvals and attractive credit models to attract more borrowers.
Peer to Peer Lending Registration and Peer to Peer Lending License
Starting the peer to peer registration process to get the peer to peer lending license could be a cumbersome process. All the countries around the world have different rules regarding P2P lending license as they could prove to a major competition for banks operating in the nation. In India, if you want a peer to peer lending license then you must register your company as an NBFC P2P with Reserve bank of India (RBI). Let’s understand the complete process of peer to peer lending registration.
RBI directives and the Process to Get Peer to Peer Lending License
On 4th October 2017, the Reserve bank of India issued direction for peer to peer lending registration of NBFCs and the requirement of peer to peer lending license. All such companies who are licensed by RBI to carry out operations as a P2P lending platform should abide by the directives laid down by RBI. The directives are as follows:
- The limit of investment for any investor under all available peer to peer lending platforms at any given point of time is set at 1000000 lakh rupees. No investor can cross this limit of investment.
- For a single borrower, a lender can invest up to INR 50000 across all peer to peer lending platforms.
- The total amount of loan that a borrower can avail on any single point of time cannot exceed INR 1000000.
- The maturity period of loans should not exceed 36 months for any lending.
All the P2P registered under RBI must abide by these directives to conduct their business as the P2P NBFC. Now, let’s look at the process of getting peer to peer lending license in India.
Process of Peer to Peer Lending Registration
- Apply at RBI: Start by writing an application form to the Department of Non-Banking Regulation of the Reserve bank of India’s Mumbai Office. The forms are specified for this purpose and are provided by the bank. When the directives of RBI were out on 4 October 2017, all the existing NBFCs at the time wanting to register as P2P lenders were directed to submit their registration application within 3 months.
- The bank Stated the following conditions to be met before applying for registration:
- The NBFC must be incorporated in Indian territory.
- It should have an adequate capital structure to meet the need of conducting peer to peer lending business and set up a lending platform.
- It should also have all the entrepreneurial, technological, and managerial resources to give services to all the participants of the lending process.
- The directors/promoters of the company should be fit for the role and the general perception of the management should not be prejudiced to the public interest.
- The company must have a robust and precisely planned IT architecture to tackle all the difficulties of running a business online. If the company is yet to set up all the IT infrastructure, then it should submit a detailed plan giving information on how the system will handle the business and whether it follows all the security norms or not.
- The company should also submit a viable business plan to conduct the peer to peer lending on its platform.
- With the grant of Certificate of registration of peer to peer lending license, they will serve the public interest.
- Any other condition as may be specified by the Bank, the fulfilment 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.
- Principal Approval: if the bank is satisfied with the new company about conditions fulfilment, then it grants a principle approval to set up a peer to peer lending NBFC.
The in-principal approval of the bank will be valid for 12 months from the date of approval.
- Meeting terms and conditions: The company must set up all the infrastructure and implement the business plan within 12 months from the date of grant of approval. The company also must complete all the legal documentation and report the bank about the position of compliance on the standards set to grant the license.
- Granting License of CoR: if the company meets all the compliance norms and the bank is satisfied by its infrastructure to carry out the lending business, then it grants a CoR to the company as a registered NBFC-P2P. However, this peer to peer lending license can be revoked by the bank on a few conditions.
Conditions for Cancellations of CoR
The bank could cancel the peer to peer lending license of the NBFC if,
- It is unable to carry out or doesn’t carry out its business in India.
- The company has failed on any compliance norms set by RBI subject to which the CoR is liable to be cancelled.
- It doesn’t meet the basic conditions of holding a CoR.
- It fails to comply by any direction issued by RBI in future.
- The company doesn’t maintain accounts, publishes or discloses its financial position if required under any law or directives issued by the bank.
- If the company fails to offer or submit its accounts book or any other related document whenever asked by the bank.
Advantages of P2P Lending NBFCs in Indian Financial Market
Many experts believe that the NBFCs could play a vital role in the development of Indian economy. The NBFCs are key players in the small business or MSMSs financing markets. Most of the MSMEs are looking for small loans for their businesses which they may not get from big banks due to the strict norms or other unavoidable reasons. P2P NBFCs play a vital role in such scenarios by financing these small businesses with loans at lower rates. Besides, these P2P lending firms share the loads from banks to ensure that the financial stability has reached to every section of the society. Here are a few reasons why P2P NBFCs are great for Indian Financial Market.
Availability of Low-Cost Loans
As mentioned in the above sections, the P2P lending NBFCs connect the lender with the borrower directly and removes the mediator (banks). This ensures lower interest rates for the borrower to get loans for their businesses. With relatively higher returns on investment for lenders, this becomes a win-win scenario for both the parties involved in the transactions.
“The impact of P2P lending was visible in August 2018, when MSMEs affected by credit crunch due to ILFS crisis, suffered a further setback as RBI increased the repo rate which impacted borrowers who had to pay higher EMIs on their loans due to increased interest rates. With the cost of lending at a high, Faircent.com slashed its lending rates for worthy borrowers to an all-time low of 9.99% P.A which led to MSMEs shifting to P2P lenders for credit.”
The above scenario is just one example of how small businesses with lower profit margin have been immensely helped by P2P platforms.
More Options for Small Business Owners
The requirement of small businesses differs from that of large corporates. Hence, the loan requirements for different activities also differ for small enterprises. Mostly these enterprises need small loans to meet a temporary shortfall of cash. These could include paying salaries to the employees, executing a large order suddenly, or in research and development. The larger banks have plans that rarely if ever cater to the needs of these small businesses and are mostly focussed on the requirement of large corporates. Whereas, the P2P NBFCs have an assortment of plans that meet the requirement of these small vendors, merchants, and distributors. These platforms also work as a medium of investing money for small businesses as they can lend small loans to other vendors using these platforms and make healthy returns on their investment. This also leads to increased financial engagement of small business owners.
Increased Alternative Credit Supply
Gone are the days when credit supply was the sole responsibility of the banks and other bigger financial institutions. These big organisations were ruled by inflexible policies that acted as a roadblock for them to access the large part of the Indian population with a humble background. The alternative credit supply chain created by the P2P NBFC has led to financial inclusion of the lower class of society. These lenders have also reduced the loads from banks to cater to every section of society. Also, these lenders work online and thus, it also reduces the barrier of reach to borrowers as one can apply for credit from any part of the country.
Financial Inclusion of Potentially Risky Borrowers
Banks had a restraining policy towards small businesses as they were termed as potentially the riskier clients. The small business could not come back from any sudden downfall in business and so, were not eligible for loans from most of the banks. The P2P NBFCs have flexible norms to lend loans to small business and offer cheaper interest rates that make paying off the loans easy for these businesses. This has led to the financial inclusion of the small business who were traditionally kept out of the purview of the organized credit system. Even the credit-worthiness of various borrowers is decided by tech-based algorithms that run analyses of their business and offers a credit amount accordingly. This has led to small business ideas being financed and thus seeing the implementation which was denied due to lack of funds.
Empowering Start-ups by Women
A well-known fact is that empowering women entrepreneurs not only improves the economical prosperity of their family but also adds to the development indicators of the society where the business is established. The P2P NBFCs provide loans to many start-ups led by a group of women working to make it large through their small businesses. These start-ups do not have any risk cover, neither the groups have a significant economic background to support their cause. Therefore, small loans to such groups were denied by banks due to the high risk of default. With the advent of P2P lending, the risks are lower due to low-interest rates and so the net profit margins for these small businesses has also increased.
Serving Small Town and Rural Population
Various reports across the country have indicated that despite having branches of regional rural banks spread across the country and other banks trying to reach the far hinterlands of India, the financial inclusion among small towns and rural areas remains low. The credit deficit in such areas could be easily managed by P2P NBFCs as they mostly operate online. The cost required for NBFCs to operate in such areas is also very low and therefore, they can easily have a physical presence in such areas compared to a large bank. Many P2P NBFCs are rapidly expanding their business to many small towns in India and offering loans at a reduced interest rate to small businesses. This shows the contribution of NBFCs toward increasing financial inclusion and development of the population in small towns and rural areas.
In the above sections, we saw how India’s P2P market has high growth potential and with a high influx of investment by various lenders, the future of P2P lending looks bright. To the investors we can only say, it is a great opportunity to take advantage of the growth potential of this market, many investors are multiplying their returns by reinvesting their returns from P2P lending. This shows how P2P is a simple yet profitable investment idea in the Indian Financial Market. As John C Bogle Once Said,
“To earn the highest of returns that are realistically possible, you should invest with simplicity.”
How Muds Can Help You in Peer to Peer Lending Registration?
Muds Management is a consulting firm that specialises in the registration process of NBFCs and getting them peer to peer lending license to operate across the country. With an experienced team of expert and impeccable service record, our legal team leaves no stone unturned to give a hassle-free experience to our clients. If you are a new company and want the peer to peer lending registration for your business in India, then you can contact us for an overview of how we can help your business. We specialize in the following services,
- NBFC-Peer to Peer Lending License
- Company Registration with ROC with P-2-P Objects
- Preparing RBI Application for Peer to Peer lending License
- IT and Data Security Policy Framework of new P2P NBFCs
- End to End Liaising with RBI during the registration process
- Helping new enterprises to in easily getting NBFC License
We also specialize in other corporate services like incorporation or New Business Setup, Microfinancing Business related services, company registration in India, Mergers/Acquisitions, etc.
You can schedule your free consultation today with our legal expert on +91 9599672352. You can also contact us on email by writing on Shweta@muds.co.in.