The RBI has come out with a well-designed regulatory regime of Peer to Peer lending operators. Their operational boundaries are defined, scope of operations marked and regulations are designed. As per the RBI’s 2017 regulations, the Peer to Peer (P2P) entities are to be regulated as Non-Banking Finance Companies-Peer to Peer (NBFC-P2P)s.
What is Peer to Peer Lending?
According to the RBI guidelines, ‘Peer to Peer Lending Platform means an intermediary providing the services of loan facilitation via online medium or otherwise, to the participants.’ Participants are persons who has entered into an arrangement with an NBFCP2P to lend on it or to avail of loan facilitation services provided by it.
The P2P lending is carried out through the internet platforms of the P2P lending companies. These companies charge a small commission for their services. Most of the loans are unsecured (no collateral) small personal loans.
Peer to Peer Directions 2017
For the regulation of the P2P sector, Reserve Bank issued the NBFC-P2P Directions in October 2017. As per this direction, the online platform that acts as the P2P itself should not undertake any financial activity. Rather, it provides a platform for credit intermediation, bringing together borrowers and lenders. The purpose of regulations on the sector is ensure customer protection, data security and orderly growth.
The RBI also describes the associated features of P2P. “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.”
Classification as well as regulation of peer to peer lending has been done by the RBI after the October 2017 regulations.
Any entity that is not a bank, NBFC or an All India Financial institution would like to lend electronically, should get an NBFC-P2P registration from the RBI.
What is NBFC-P2P?
Non-banking financial company – Peer to Peer Lending Platform (NBFC-P2P) means a non-banking institution which carries on the business of a Peer to Peer Lending Platform.
Eligibility and Registration for P2P
- Only entities registered as a company can get P2P registration from the RBI.
- Every NBFC-P2P shall obtain a certificate of registration to start P2P lending activities before starting operations.
- Every company seeking registration with the RBI as an NBFC-P2P shall have a net owned fund of not less than rupees twenty million (Rs 2 crores) or such higher amount as the RBI may specify.
- After receiving applications, RBI may check and grant NBFC status for providing P2P lending. All P2Ps should avail a registration from the RBI as an NBFC. Still, an existing NBFC will not be able to operate as an NBFC-P2P.
Activities of P2P
The RBI has defined P2P as an online platform that matches lenders with borrowers in order to provide unsecured loans. The P2P:
should act as an intermediary providing an online marketplace or platform to the participants involved in Peer to Peer lending;
should not mobilise deposits or give loan on its own.
should not provide or arrange any credit enhancement or credit guarantee;
should not facilitate or permit any secured lending linked to its platform; i.e. only clean loans will be permitted;
should not hold, on its own balance sheet, funds received from lenders for lending, or funds received from borrowers for servicing loans and the specified funds.
Should not permit international flow of funds;
Should store and process all data relating to its activities and participants on hardware located within India.
Prudential norms for P2P
NBFC-P2P shall maintain a Leverage Ratio not exceeding 2. (Leverage ratio indicates the extend of indebtedness. It is estimated by dividing outside liabilities by net-worth of the firm).
Lending limit: The aggregate exposure of a lender to all borrowers at any point of time, across all P2Ps, shall be subject to a cap of Rs 10,00,000/-.
Borrowing limit: The aggregate loans taken by a borrower at any point of time, across all P2Ps, shall be subject to a cap of Rs 10,00,000/.
The exposure of a single lender to the same borrower, across all P2Ps, shall not exceed Rs 50,000/-.
The maturity of the loans shall not exceed 36 months.
An NBFC-P2P shall become member of all CICs and submit data (including historical data) to them.
The loan recovery practices of other NBFCs will be applicable to P2Ps. There should be proper redressal mechanisms for complaints. Fund should be transferred directly from the lender’s bank account to that of the borrower. This is needed to check money laundering
Since P2P is an online exercise, there are many challenges for the online firms including to convince the safety of the exercise to lenders. In advanced countries, peer to peer lending is growing at a good pace because of the advanced infrastructure and the spread of online activities there. In India, the Peer to Peer culture is yet to establish its foot though it is increasingly considered as a future threat to the traditional brick and motor banking industry.
Developments in financial regulation indicates that regulators and central banks are concerned about the stability of P2P lending. A leading concern is that of safety. Difficulty in regulation and potential risks has compelled central banks and authorities to develop a cautioned approach to financial tech lenders or P2Ps. In general regulators are very risk averse especially after the global financial crisis. The US Treasury has made a warning after the failure of alternative lending frim (P2P) Lending Club. In India, the RBI has issued a consultation paper in an attempt to regulate Peer to Peer lending.