• act as an intermediary providing an online marketplace or platform to the participants involved in Peer to Peer lending;
• not raise deposits as defined by or under Section 45I (bb) of the Act or the Companies Act, 2013;
• not lend on its own;
• not provide or arrange any credit enhancement or credit guarantee;
• not facilitate or permit any secured lending linked to its platform; i.e. only clean loans will be permitted;
• 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;
• not cross sell any product except for loan specific insurance products;
• not permit international flow of funds;
• ensure adherence to legal requirements applicable to the participants as prescribed under relevant laws.
• store and process all data relating to its activities and participants on hardware located within India.

2. Further, NBFC- P2P shall –

• undertake due diligence on the participants;
• undertake credit assessment and risk profiling of the borrowers and disclose the same to their prospective lenders;
• require prior and explicit consent of the participant to access its credit information;
• undertake documentation of loan agreements and other related documents;
• provide assistance in disbursement and repayments of loan amount;
• render services for recovery of loans originated on the platform.

NBFC – P2P shall not undertake any activity other than those stated in paras 6(1) and 6(2) of these Directions. Deployment of investible funds by an NBFC P2P in instruments specified by the Bank, not for trading, shall however be permitted.

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 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, provide 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.

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.

Shweta Gupta from MUDS MANAGEMENT is recognized among the most-respected, knowledgeable and yes, pocket-friendly as well.

Why not give them a call right now at +919599653306 and start a conversation immediately.

The post Scope of Activities of an NBFC – P2P appeared first on MUDS.

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.

Read Also: What Are Different Types of NBFC and Rules for Filing Returns?

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:

1. 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.
2. b) It is not necessary to have any prior relationship between the lender and the borrower.
3. 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.
4. 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:

1. a) Every entrant looking to start P2P lending activities shall procure a certificate of NBFC-P2P Registration before working on operations.
2. b) Every company wanting NBFC 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.
3. c) After receiving the applications for NBFC Peer to Peer registration, the RBI may verify and grant NBFC status for providing P2P lending.
4. d) All P2Ps must avail Peer to Peer Lending Registration from the RBI as an NBFC.

NBFC-P2P Registration Procedure

1. 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 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:

1. a) Easy Loan Process
2. b) Lower Cost of Borrowing
3. c) Helping to fund Micro and Small Sized Enterprises
4. d) Removal of offline Agents and Paperwork
5. 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.

Shweta Gupta from MUDS MANAGEMENT is recognized among the most respected, knowledgeable and yes, pocket-friendly as well.

Why not give them a call right now at +91 9599653306 and start a conversation immediately.

The post 4 Critical Impacts of Latest RBI Notification on P2P Lending Industry appeared first on MUDS.

Micro finance business is basically a source of financial services for entrepreneurs and small business lacking access to banking and related services.

FEATURES OF MICRO-FINANCIAL BUSINESS

• Which deals with low amounts of financing to people
• Which has been registered with appropriate agency and obtained necessary licenses and permits

BENEFITS OF MICRO-FINANCIAL BUSINESS

• Provide access to funding
• Encourage self-sufficiency and entrepreneurship
• It offers a better overall loan repayment rate than traditional banking products.
• Strengthen financial condition for some days till situation gets better.

TYPES OF MICRO FINANCE BUSINESS

• Non-Banking Financial Company – Micro Finance Institution (NBFC-MFI)
• Payday loan business online
• Peer to Peer (P2p) Lending
• Small Finance Bank
• Nidhi Company

BRIEF:

1. Non-Banking Financial Company-Micro Finance Institution (NBFC-MFI)

NBFC-MFI is a non-deposit taking NBFC having not less than 85% of its assets in the nature of qualifying assets which satisfy the following criteria:

• loan disbursed by an NBFC-MFI to a borrower with a rural household annual income not exceeding 1,00,000 or urban and semi-urban household income not exceeding 1,60,000;
• loan amount does not exceed 50,000 in the first cycle and 1,00,000 in subsequent cycles;
• total indebtedness of the borrower does not exceed 1,00,000;
• tenure of the loan not to be less than 24 months for loan amount in excess of 15,000 with prepayment without penalty;
• loan to be extended without collateral;
• aggregate amount of loans, given for income generation, is not less than 50 per cent of the total loans given by the MFIs;
• loan is repayable on weekly, fortnightly or monthly installments at the choice of the borrower

2. Payday loan business online:

Payday loans have grown in popularity over the years, mainly as a result of the economic downturn and tightening lending practices by banks and credit unions. Many individuals who previously could get approved for a personal loan or borrow against the equity in their homes have found that they no longer qualify for these types of loans. Payday loans are short-term loans which require no collateral and generally range in amounts from 5000 to 50000. They are meant to be fully repaid within a very short period of time (two weeks). Lenders provide these loans to consumers who are faced with an unexpected financial situation which can’t be put off until the next time they get paid

3. Peer to Peer (P2p) Lending:

P2P lending is a form of crowd-funding used to raise loans which are paid back with interest. It can be defined as the use of an online platform that matches lenders with borrowers in order to provide unsecured loans. The borrower can either be an individual or a legal person requiring a loan. 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.

4. Small Finance Bank:

The small finance bank shall primarily undertake basic banking activities of acceptance of deposits and lending to unserved and underserved sections including small business units, small and marginal farmers, micro and small industries and unorganised sector entities. 

Criteria for incorporation of small finance bank

• The minimum paid-up equity capital for small finance banks shall be Rs. 100 crore
• Promoter’s minimum initial contribution to the paid-up equity capital of such small finance bank shall at least be 40 per cent
• Promoter/promoter groups should be ‘fit and proper’ with a sound track record of professional experience or of running their businesses for at least a period of five years in order to be eligible to promote Small Finance Banks.

5. Nidhi Company:

“Nidhi” means a company which has been incorporated as a Nidhi with the object of cultivating the habit of thrift and savings amongst its members, receiving deposits from, and lending to, its members only, for their mutual benefit.

BRIEF PROCEDURE REQUIRED TO BE FOLLOWED FOR SET-UP MICRO FINANCE BUSINESS

• The Applicant Company must be incorporated under the new Companies Act 2013, or the earlier Companies Act, 1956.
• The applicant company must have sufficient net worth according to the micro finance business requirement.
• Determine your risk bearing capacity
• Get registered with regulation agency and obtain the necessary permits/license.

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