What is Peer to Peer Lending License? Peer to Peer (P2P) lending platform is basically an online platform to raise loans which are to be paid back with interest. The borrower may either be an individual or a legal entity. The online platform may set the interest rate to be charged on the loans or it may be decided mutually between the parties. P2P lending has been proved best for the startups & entrepreneurs to kick start their business as they need seed or venture funding. While if we talk about taking a loan from bank; it charges higher rate of interest. On this platform, entrepreneurs can easily borrow money from individuals. In simple words, we can say that Peer to Peer (P2P) lending is a form of social lending under which individuals can lend or borrow money. There is no involvement of any financial institution, therefore, lenders are free to choose borrower. This concept of lending is gaining popularity among lenders as they get higher rate of interest. Concept of Peer to peer Lending License Peer to peer lending involves the online facilitation of loans between individuals or businesses, affixing borrowers with lenders for a more direct lending process. It occurs on a wide scale through digital methods. In addition to that, P2P lending is also considered a type of debt financing method that allows the individual to lend money without any financial organisation acting as an intermediary. The Peer to peer lending license also eliminates the middleman, saving both lender & borrower from paying any amount of money to the middleman. The Reserve Bank of India is an apex body that grants a peer to peer lending license. What is P2P Lending? P2P lending is a method of debt financing under which individuals can lend or borrow money without the involvement of any financial institution as an intermediary. P2P lending companies is regulated by the Reserve Bank of India. They operate online involving low overhead cost. It is proving profitable for lenders as well as borrowers in such a way that lenders can earn higher rate of interest while borrowers can borrow at lower rate of interest. P2P lending platforms are technology driven companies which are registered under the Companies Act. They act as an aggregator between lenders and borrowers. On P2P lending platform, lenders and borrowers register themselves on the website. Thereafter P2P lending platform carries out due diligence and approve the applications for participation in lending/borrowing activity. For carrying out a P2P lending business, one has to obtain license from the Reserve Bank of India. For obtaining a P2P lending license, a proper application is filed with the authority along with the necessary necessary papers by the expert professionals. Enterslice has a team of professionals who have expertise in this field, so if you’re interested in obtaining P2P lending license then you can contact us. What are the characteristics of Peer to Peer Lending Platform? P2P Lending model is revolutionizing the global financial market and reshaping the financial industry from past few years by introducing new innovative modules and lending services. Custom designed P2P lending platform is the best alternative in comparison to old-style exercise of borrowing money from banks as banks take long time to approve loans. Instead of approaching banks and applying for loans, P2P lending platforms can be used, where we only need to provide necessary information from sitting at home/ office and within hours our loan will be processed and approved. Here are the following characteristics of Peer-to-Peer Lending P2P Lending platform involves online transactions Prior relationship between lenders and borrowers is not necessary On P2P platform, lenders can freely choose borrowers to invest in No direct intermediary negotiating interest rates or amounts. What are the pros & cons of Peer to Peer Lending Platform? Peer to Peer Lending carries its own set of pros & cons. 1. Pros & Cons of P2P Lending for Borrowers Low-Interest Rates: The borrowers can avail the benefits of low-interest rates as compared to banks and credit cards. In some cases, a reduction of about 35% has been witnessed. Fixed Rate of Interest: This type of platform provides the leverage of a fixed rate of interest even in the case of late payments, thereby, it acts as a lucrative option in the hands of the borrower. Simple and Fast Processing of Application: The customers are provided with an exclusive digital experience of facilitating a rapid flow of transactions. Lower Fees: the platform charges lower fees as compared to other modes of finance. Additionally, no penalty is attracted to pre-payment. In comparison to banks, it involves low amount of loan. Less security. Sometimes borrowers are more than lenders. 2. Pros & Cons of P2P Lending for Lenders Higher Returns: Generally, the returns offered to the investors are higher, depending upon the type of risk you undertake. Diversification: For investors, there is a wide variety of options available to put their capital into. Direct communication with the Buyer: The platform provides the lenders an option to directly communicate with borrowers and finalize their deal with the borrowers. Whether the credit rating assessment done by the platform is reliable or not, is a concern. Therefore, the risk associated is not certain. With the P2P industry still in its nascent stage, it would be too early to reach a definitive conclusion. Returns are lower in comparison to publicly traded index funds. Regulatory Framework of Peer to Peer Lending Platform While most of the crowd-funding- be it, equity, debt or fund based, fall under the purview of the capital market regulator-SEBI, the P2P lending is regulated by Reserve Bank of India. Different jurisdictions of the world treat P2P lending differently. In some countries, they are identified as banks while in other countries, they are treated as intermediaries. This drags us into understanding the global scenario circumventing the P2P lending across the world. Given below are the five ways in which P2P lending has been regularised according to the RBI consultation paper: 1. Market Exempted/ lack of definition In Countries like China, Ecuador, Egypt, South Korea, and Tunisia P2P lending platforms are exempted from regulations due to a lack of legislative definition. In some cases, these are exempted to protect the interest of the borrowers from various unfair practices. 2. Intermediary Regulation In Countries like Australia, Argentina, Canada, New Zealand, United Kingdom, P2P lending platforms have a mandatory requirement of an intermediary registration. This Intermediary Regulation depends on the jurisdiction. 3. Banking Regulation In countries like France, Germany, and Italy P2P lending platforms have to obtain a banking license This is regulated as a bank due to its credit intermediation functions. 4. US Model In the United States of America P2P lending is framed under the Securities and Exchange Commission (SEC) responsible for investors. Whereas the Consumer Financial Protection Bureau and Federal Trade Commission regulate the borrowers. 5. List of Prohibited Countries In countries like Israel and Japan P2P lending is banned according to their respective legislation. Different countries have different regulations for operating P2P lending. Peer to Peer Lending in India The online market for loans and investments is growing at a rapid speed, so it is important to make a way for a wide cadre of investors and fund seekers to meet at a common platform for the satisfaction of their financial motives. Although Peer to Peer Lending (P2P) is in its infant stage in India and the risk associated with the P2P lending in the financial market is too prominent to be ignored. There is a one factor which has enhanced the rise of Peer to Peer lending industry in India, i.e, during 2016-2017 slowdown in lending by the banks. This slowdown forced to seek other methods of lending in industry. As per the sources it has been predicted that by the year 2023, this industry will grow into a $ 5 billion. Presently there are more than 30 players in market like Faircent, Lentbox, Capital Float, Indifi, IndiaMoneyMart, Monexo, Rupaiya Exchange, Capzest LoanBaba, i2iFunding etc. To regulate P2P lending platforms, RBI releases guidelines so that they can grow in a structured, fair and regulated manner. Last year RBI also notified that Peer to Peer lending platforms would be treated as Non Banking Financial Companies (NBFC). RBI issues guidelines time to time in order to safeguard the interest of all lending platforms and lenders as well as borrowers. It has been also predicted by the experts that soon P2P lending portals will be able to access credit data. Peer to Peer Lending in Global Scenario In countries such as Israel and Japan, the P2P lending is completely prohibited. Certain countries such as Australia, Canada, UK treat them as the financial intermediaries. In China, Egypt, South Korea, P2P lending is not regulated and is considered as the exempt market due to the lack of definition The P2P lending is treated under the Banking Regulation in the countries such as France, Germany, and Italy. In the United States, the concerned is treated in the dual phase-one at the central level and other at the state level. Scope of Activities The P2P lending platforms are the Fintech Companies registered under the Companies Act. They help in creating the match between lenders and borrowers. After registering the borrower within itself, the platforms perform the task of their credit assessment. Only those candidates, who fulfill the due diligence test with the platform are allowed to take part in the borrowing and lending process. The platforms also provide certain additional services such as credit assessment, risk analysis, recovery etc. Even the Paper works for the lending and borrowing is facilitated by the online portal. Following are the scope of activities 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 What is the funding process under Peer to Peer Lending? 1. P2P funding via auction The lender at the p2p market place will compete with each other to fund the borrower loan requirement at lowest interest rates. The borrower loan shall be funded by the minimum 7-20 lenders depending the loan amount and each part of the loan may have a different rate of interest. 2. Via a fixed rate auction In this case, interest amount is fixed, only the loan amount has to be funded by the lenders. This model is accurate than marketplace method. 3. The marketplace P2P lending model In this model either P2P lending platform by itself or the finance associates or a bank associated with the platform will complete and underwrite the loan requirement of the Borrower. Once this process is completed and the p2p lending platform well sells the loan ID to interested lenders. What are the types of Peer to Peer Lending Model? Now let’s discuss the classification of Peer to Peer Lending model into following types of lending 1. Consumer Lending Small personal loan like for cars / family or self-weddings / holidays / home repairs / repayment of credit card dues. 2. Small Business (SME) Lending SME loans are provided to small business for the following purposes Working capital Business expansion Asset finance Generally, founders offer a personal guarantee against the loan. 3. Property Lending This is secured P2P lending against the 1st charge of the commercial or residential property. The loan is borrowed for personal mortgages, Buy-to-lets, Residential refurbishment, and developing commercial loans. This model is not popular in India. How does Peer to Peer Lending platform works? On peer-to-peer lending platform, loans are taken by the borrowers from the individual investors (lenders) who are willing to lend their money to the borrowers on an agreed rate of interest. On P2P lending platform, the profiles of the borrowers are displayed, from where lenders can freely choose the borrowers’ profile and take decision of lending money. It is not necessary to have any relationship between lender and buyer. It is not necessary that proposed borrower receive full loan amount, he may get certain amount of what he asked for from an investor. For the remaining amount, the loan may be given by one or more investors on the P2P lending platform. How Peer to Peer Lending is different from banks? Usually, individuals or business entities who want to take loan, apply for it from banks. In turn, a bank takes a long time in verification of extensive financial background. This is done by the banks to determine the credit score of applicants and the loan history. On the basis of verification, banks take decision whether the proposed borrower is qualified for a loan. In comparison of banks, Peer to Peer lending platform involves faster processing of loan as there is no intermediary. Some of the common differences between Peer-to-Peer Lending and Banks are as follows: 1. Duration Banks has a longer procedure for conducting customer financial status verifications, whereas, Peer to Peer Lending has a faster procedure due to its less stringent rules and regulations. 2. Product Banks provide standardized lending products to the customers, whereas a customised solutions are delivered through Peer-to-Peer lending Platforms. 3. Approach Banks have a close look out on the customer's credit scores, on the other hand, a data driven approach is provided by Peer-to-Peer lending. 4. Rules & Regulations Banks have a stringent regulatory framework as it has a proper involvement of credit rating assessment, whereas Peer-to-Peer lending is much more flexible when it comes to rules and regulations, thus it has less risk associated. 5. Loan Amount Banks have no limitation on the loan amount, whereas Peer-to-Peer lending has a maximum limitation of Rs. 50,00,000 (Fifty lakhs). What are the basic requirements for obtaining Peer to Peer Lending License? The P2P Lending platforms come under the purview of Reserve Bank of India taking the definition of NBFCs under section 45I(f)(iii) of the RBI Act. The various pillars governing the regulatory framework are 1. Prudential Requirements: A minimum capital of INR 2 crore is required. 2. Governance Requirements: It includes fit and proper criteria for promoters, directors, and CEO. The Board must also consist of a reasonable portion of members having a financial background. A physical place of business is also required to be established in India, with the management primarily based in the country. 3. Business Continuity Plan:Adequate risk management policy shall be put in place by the platform acting as the custodian of cheques and agreements. 4. Customer Interface: Since the platform uses the data of the customers to assess their credibility, it is the duty of the portal to safeguard their information in the first place. Their operations shall be transparent, the data confidentiality shall be maintained. There shall be no false promises regarding extraordinary returns. 5. Reporting Requirements: These online entities are required to submit regular reports based on their financial position, loans arranged in each quarter, complaints received in each quarter etc. to the Reserve Bank of India. 6. Loan Amount : Loan amount to one borrower cannot exceed more than INR 1 Million. When we are clear about the regulatory framework working around the P2P lending, let's take a look at the eligibility to apply for Peer to Peer lending license. Permitted Activity under Peer to Peer Digital Lending Platform These are the following activities that are allowed under Peer to Peer digital lending platform in India mentioned below: To furnish an online platform for all the players in the Peer to peer lending license process to act as their intermediate mediator. Players of P2P digital lending platforms are not permitted to lend money to one another. Neither the Companies Act of 2013 nor section 25 I (bb) of the RBI Act permits deposits to be raised for the Peer to peer lending business. They cannot arrange or provide any credit guarantee or enhancement service. Any peer to peer digital lending platform is not permitted to support any safe or secured online digital lending platform, and lending is only permitted to grant clean loans. They cannot include any money received from the lender or borrowers in their annual balance sheet. They are permitted for loan insurance products but not for P2P digital lending companies to market services or products. The P2P digital lending platform cannot allow the international movement of funds. Comply with all legal norms or requirements that apply to participants under the applicable legislation for Peer to peer lending license companies. It is mandatory for Peer to peer lending license companies to process and store all data associated with their activities in India. Who is eligible to apply for Peer to Peer lending License? Following below mentioned are eligible to apply for Peer to Peer Lending License in India A company registered in India Applicant must possess technological, entrepreneurial and managerial resources In order to carry out P2P lending platform, an applicant must have adequate capital structure Proposed Directors must fulfill the fit and proper criteria There must be a proper plan for efficient Information Technology System A viable Business Plan Motive to serve in public interest What is the procedure of obtaining Peer to Peer Lending License? Any entity desirous of commencing the business of P2P lending and registered as a Private Limited Company or Public Limited Company can apply to RBI for the P2P license. For this, they have to fulfill the following Company should be registered in India as Private Limited Company or Public Limited Company with the principal objective of financing Minimum net owned funds of INR 2 crores. Website / Mobile App Work Flow The online application is available on RBI's website (COSMOS). Submission of hard copy of the application along with attached necessary papers shall be submitted to RBI Office. The license will be granted only after vigilant inspection of the application and necessary papers attached with it. Transfer Mechanism for P2P Lending Platform in India There are certain procedures for funds transfer mechanisms for obtaining P2P lending licensing in India as follows: Some funds must be exchanged between participants on the digital P2P lending platform using the Escrow Account Mechanism, which must be controlled and executed by a trustee. To channelise the fund transfer mechanism, there must be a minimum of two escrow accounts; the first one is for receiving funds from lenders who are waiting for the disbursement, and the second one is for the borrowers. Bank accounts can only be used to conduct all transactions, which means that transactions in cash are strictly prohibited. P2P lending license vs. Crowdfunding: How are they different? There are specific differences between the P2P lending license and crowdfunding, as mentioned below for your better understanding: Peer to peer digital lending, in which loans can be repaid and increased at a fixed interest rate, can moderately be crowdfunding in India. Peer to peer digital lending platform can be an online platform where the borrowers and lenders register to increase the unsecured loans. There is an option for the borrower as an individual or legal corporate entity under this arrangement. Peer to Peer Digital Lending Platform: Roles & Responsibilities There are some responsibilities to abide by the Peer to peer digital lending platform in India, as mentioned below for your better understanding: Before approval of participants to become P2P platform to perform the company due diligence Risk profiling and credit assessment of the listed borrowers and disclosure results of the registered lenders. Express and previous consent of the participants mandated to get access to their credit information. Procedure to follow for documentation for the loan agreements and other documents. Assitance for loan recovery and other loan recovery services has to be oriented on the platform. Update on Peer to Peer Lending License by RBI The Reserve Bank of India is the supreme body that controls the functioning and regulation of the banking and non-banking sectors. So, the RBI has come up with an update or modification related to peer to peer lending licenses: A new fintech lender company, Credit Fair, secured Peer to peer lending license from the central bank, i.e., the Reserve Bank of India, aiming to feed over one lakh investors in the next three years. The loan facilities under the Credit Fair will lend up to the amount of 10,000 INR with a minimum investment tenure of 6 months with the credit score report of the borrowers. RBI has devised a more scrutinised process for peer to peer lending platforms, with structured guidelines for mitigating risk through promises of high or assured returns. Also, RBI has targeted some peer to peer lending platforms working outside the purview of guidelines, including any defect in the KYC process. Minimize Risk and Maximize Returns on the Peer to Peer Lending platform In P2P Lending, borrowers are being provided with the low rate of interest than those offered by the other money lenders in an unorganized sector. Under this, lenders earn higher returns than what traditional investment opportunities offer. Interest rates charged on the loans vary from one platform to other ranging from a flat interest rate fixed by the platform to dynamic interest rates as agreed upon by the borrowers and the lenders. Ways to get benefit of returns To get the benefit of higher returns, diversify investments. To benefit from the power of compounding, regularly reinvest payments. To minimize default, divide overall investment and lend to multiple borrowers within the same category. Online Platform under P2P Lending The online platform under P2P lending provides services such as collection of the loan, repayments from the borrowers, assessing of borrower’s credit-worthiness etc. The fees collected by the platforms are generally incurred in facilitating the above-mentioned services or to pay the general business expenditures. As in the case of general financial intermediation, the online platform does not earn from the spread between the lending and deposit rates. Rather, they make a profit from arrangement fees and from the credit scoring of the borrowers. Online Platform Fees under P2P lending Both the lender and the borrower pay pre-decided fees to the lending platform. The borrowers pay origination fees at either a flat rate or as a percentage depending upon the amount of loan raised by them. The origination fees as stated above also depend upon the risk category associated with the funds raised by them. The lenders generally pay administration fees. If they choose to avail any other services provided by the platform, such as advisory, risk analysis, etc., then, an additional fee are also required to be paid by them. How Enterslice can help you in obtaining Peer to Peer Lending License? Enterslice is leading platform which provides financial advisory services. We offer financial advisory services in more than 22+ Countries. You just have to visit our website enterslice.com and fill your basic details like name, Email Id & Mobile No – Click on Get Started button. Then we request you to wait for a Call back by a consultant, alternatively if you are in hurry then you can directly make the payment and start the process if you are clear about the Peer to Peer Lending license process. Our team of experts will call you back in 4 to 8 Working hours and after that, if you will have any further query, then a professional from our senior management will speak with you on Skype. You can also drop an email on info@enterslice.com After explaining the process for obtaining P2P license as per the guidelines prescribed by the government, team of Enterslice will share a detailed checklist of necessary papers required from your end for further action. We will assign you a unique order Number to track the progress of the assignment. You can also upload necessary papers by using Mobile application of Enterslice which is available on Google play store for Android users and the Apple App Store for iOS users. You can also email your necessary papers to support@enterslice.com We will assign your assignment to our team with a Combination of Professionals like CA, CS, and Lawyers. You can track the status of your order on our website or by using Mobile App. We will send regular updates via email about the work progress. Our team will handle end to end process like collection and arrangement of all the necessary necessary papers for P2P license and filing of application along with the necessary necessary papers with the concerned department of RBI. For tracking the status of your order you can write us on support@enterslice.com and for Feedbacks/Complaints write to care@enterslice.com
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