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Details About P2P Lending Compliances Requirement

Akash Dubey

| Updated: Nov 06, 2019 | Category: Startup

The Peer to Peer lending platforms is subjected to exercise P2P lending compliances as required by the Reserve Bank of India and the Ministry of Corporate Affairs[1]. The compliances ensure the healthy working of the entity with safeguarding the interest of investors and stakeholders.

The Reserve Bank of India directs to P2P lending entities to comply with the following list of compliances,

  • Data submission to CICs
  • Transparency and Disclosure Requirements;
  • Fair Practice Code;
  • Participant Grievance Redressal;
  • Information Technology Framework, Data Security and Business Continuity Plan;
  • Fit and Proper Criteria;
  • Approval of RBI required before performing taking specified actions;
  • Reporting Requirements;
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1. Submission of Data to CICs

It is mandatory for a P2P entity to enroll itself and become a member of CICs (Credit Information Companies). Additionally, they are under an obligation to submit their data (including historical data) to the CICs.

They are under obligation to maintain a record of borrowers on their platform and update it regularly. The tenure for the regular update date is mutually decided between the P2P entity and the CICs. The procedure ensures that the credit record of the participants is authentic, complete and duly updated. However, it is essential to ensure that the consent of the participants is taken before collecting their data.

2. Transparency

It is essential to maintain complete transparency by the P2P entity in favor of the Reserve Bank of India and the participants. Therefore, such entities are required to disclose significant information in relation to the lender, borrower and the public in general. Such a step ensures that the vital information is available to the regulatory, the stakeholders, participants and potential stakeholders & participants of the P2P entity.

(A) Disclosures

(i) Disclosure for Lenders:

  1. Details about the borrower’s personal identity, credit history, loan requirement, rate of interest sought, and credit score evaluated by the P2P NBFC.
  2. Details about the terms and conditions are in practice for the loan process, includes fees, returns, and taxes.

(ii) Disclosure for the Borrower

1. Details about the lender, such as proposed amount, and rate of interest. However, it excludes the identity and the contact details of the lender.

(iii) Public Disclosures on its Website:

  1. Overview of credit assessment/score methodology and factors considered;
  2. Disclosures on usage/protection of data;
  3. Grievance redressal mechanism;
  4. Portfolio performance including share of non-performing assets on a monthly basis and segregation by age; and
  5. Its broad business model

(B) NBFC P2P entity must ensure that the operations of the company must be documented. The entity shall ensure that necessary agreement between the participants of the services and the entity must take place. The agreement shall mention all the terms and conditions among the lender, the borrower, and the NBFC-P2P entity.

(C) The interest rates displayed on the Platform shall be in Annualized Percentage Rate (APR) format.

3. Fair Practice Code

Fair Practice Code is the code of conduct of P2P Entities based on the guidelines issued by the RBI for P2P NBFCs. The entity should draft the code, and the same should be put on its website for public display.

Further, there are guidelines about the behavior of staff for the recovery process from borrowers. The direction states that the staff should undergo appropriate training and should not equip with harassing conduct towards the participants.  

The code also mentions of provisions to protect the privacy rights of the participants. The code states that the information related to participants in possession of the NBFC-P2P shall not be shared with any third-party entity without the approval of the subjects.

The RBI directs for a periodic review of fair practice code in order to ensure the effectiveness of the same. The board shall also review the grievances redressal mechanism at various levels of management.

The consolidated Report of reviews of such nature shall be submitted to the board at regular intervals.

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4.Participant Grievance Redressal

The RBI directs the P2P entity to address the complaints and grievances of the participants by the formation of the subjected policy. The policy should be approved by the board.

Further, it directs the NBFC to display the following information on its website.

(A) The name and contact details (Telephone / Mobile numbers and email address) of the Grievance Redressal Officer who can be approached for resolution of complaints against the NBFC-P2P.

(B) If the complaint/dispute is not redressed within a period of 1 month, the participant may appeal to the Customer Education and Protection Department of the RBI.

5. Information Technology Framework, Data Security and Business Continuity Plan

The RBI wants to ensure the security of transactions and the exchange of data that takes place on the P2P Lending platform. Hence, guidelines to ensure the safety of data and transactions are laid down by the apex authority. IT framework ie equally important as P2P Lending compliances.

(A)There should be robust infrastructure for the IT system to get protection from unauthorized access attempts made by hackers and non-stakeholders and to ensure safety from an alteration of data.

(B)The NBFC-P2P should have a business continuity plan duly approved by the board to ensure the safekeeping of information and documents and loan tenures of active credits in case of closure of the platform.

(C)The internal systems and process of IT shall undergo an information system audit at least once in 2 years by a CISA certified external auditors.

(D) The report of external auditors should be submitted to the regional office of the Department of Non-Banking Supervision of the RBI, within one month from the date of submission of Report by an external auditor.

(E) The P2P NBFC should ensure that loan agreements shall be exercised as penned down by the third-party entities.

(F)NBFC-P2P would be required to comply with the master direction released by the RBI in concern to Information Technology Framework at all levels.

(G) The NBFC under the Ombudsman Scheme for Non-Banking Financial Companies 2018 shall appoint Nodal Officer/ Principal Nodal Officer in accordance with the guidelines laid by the RBI.

6. Fit and Proper Criteria

A P2P NBFC has to follow certain guidelines issued by the Reserve Bank of India in relation to the eligibility of the directors and shareholders of the NBFC. These requirements are known as ‘Fit and Proper Criteria.’

A. The NBFC must follow the following guidelines;

(i)A board-approved policy for drafting the Fit and Proper Criteria to be qualified by the directors. Such criteria shall be consistent with the RBI directors.

(ii)The director must qualify the Fit and proper criteria during the period of their appointments as well as on an ongoing basis. The same should be certified and inform to the Reserve bank of India[2] on a half-yearly basis.

(iii)It must obtain declaration and undertaking from the directors giving additional information that can be substantial to their appointment.

(iv)Obtain a deed of Covenants duly signed by the directors, which shall be in the prescribed format as laid by the RBI.

  • The P2P entity must inform the RBI in case of a change of Directors/KMP. Additionally, it must issue a certificate from MD/CEO that the selection of the directors followed the Fit and Proper Criteria.
  • The information about the change of director must reach the concerned Regional Office of the Department of Non-Banking Supervision of the RBI within a period of 15days.
  • The P2P NBFC must submit the name of the directors for the quarter ending on March 31 to the Regional office in an annual statement. The statement shall be submitted by the CEO and certified by the auditors.
  • The RBI in its capacity can audit the eligibility and fitness of directors. Additionally, the RBI can remove the concerned director/directors in NBFC P2P by issuing an advisory to the entity.

7. Prior Approval of RBI in Certain Cases

(A) The prior written permission of the RBI shall be required for:

(i) Allotment of shares – The prior permission should be taken in such a case which will take the aggregate holding of an individual or group to the equivalent of 26% and more of the paid-up capital of the NBFC-P2P;

(ii) Takeover or acquisition – The NBFC P2P shall take prior permission for any change in control irrespective of whether it brings any change in management or not.

(iii) Any change in the shareholding – Any change in shareholding will require prior approval from RBI. It can be a one-time increase or gradual increase over time, resulting in the transfer of equity of 26 % or more.

However, the prior approval will not be required in case of buyback of shares or reduction capital with approval from a competent court. However, the same is to be reported to the RBI within 1 month of the occurrence.

(iv) Any Change in the Management – The entity will require prior approval in case of a change in more than 30 percent of the Directors. However, it does exclude independent Directors.

(v) Any change in Shareholding- Any change in shareholding that will give the acquirer a right to nominate a Director.

(B) An NBFC-P2P shall submit an application for obtaining prior approval of the RBI, along with the following documents:

(i) Information about the proposed Directors and shareholders;

(ii) Sources of funds should be disclosed of the proposed shareholders acquiring the shares in the P2P entity;

(iii) Declaration by the proposed Directors/ shareholders stating that they do not hold association with any unincorporated body that is accepting deposits;

(iv) Declaration by the proposed Directors/ shareholders stating that they are not in association with any other company, the application for CoR of which has been rejected by the RBI;

(v) Declaration by the proposed Directors/shareholders stating that they have not been convicted of any crime and that there are no pending criminal cases against them, including proceedings initiated under section 138 of the Negotiable Instruments Act,1881; and

(vi) Bankers’ Report on the proposed Directors/shareholders

Applications in this regard shall be submitted to the Regional Office of the Department of Non-Banking Supervision of the RBI where the company is registered.

(C)Public Notice about Change in Control/ Management:

(i) Public notice of 30 days shall be issued before effecting the transfer or sale of the ownership by sale of shares, also in case of transfer of control, whether with or without the sale of shares.

Such public notice shall be given by the NBFC-P2P and also by the other party or jointly by the parties concerned, after obtaining the prior permission of the RBI.

(ii)The public notice shall indicate the intention to sell or transfer ownership/control, the particulars of transferee and the reasons for such sale or transfer of ownership/ control. The notice shall be published in at least one leading national and in one leading local (covering the place of registered office) vernacular newspaper.

(D) Information with respect to change of address, directors, auditors, etc. to be submitted:

(i) Every NBFC-P2P shall communicate within one month of the  occurrence of any change in:

  • The details of, telephone number/s and fax number/s of the registered / corporate office, postal address ;
  • The details of the residential addresses of the Directors of the company;
  • The details of the names and office address of the auditors of the company;
  • The specimen signatures of the officers authorized to sign on behalf of the NBFC-P2P to the Regional Office of the Department of Non-Banking Supervision of the RBI within whose jurisdiction the Registered Office of the NBFC-P2P is located.
  • NBFC-P2P shall conduct a self-assessment of their existing outsourcing arrangements and bring these in line with the directions prescribed by RBI

8.Reporting Requirements

The Reserve Bank of India issues the following directory for the NBFC-P2P lender as a part of their reporting requirements. These P2P lending compliances are mandatory to follow for the Entity for the P2P entity.

(A) Submission of quarterly statements to the regional office of the RBI within 15 days from the last date of that quarter. The statements should submit details of

  1. The amount of money disbursed during the quarter
  2. The amount of money close during the quarter
  3. Outstation at the beginning and at the end of the quarter
  4. The number of borrowers and lenders outstanding at the end of the quarter

(B) The number of funds hosted in the Escrow Account, bifurcated into funds received from lenders and funds received from borrowers, with credit and debit summations for the quarter.

(C) Number of complaints outstanding at the beginning and at the end of the quarter, and disposed of during the quarter, bifurcated as received from

  • Borrowers
  • Lenders

(D)The Leverage Ratio

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Akash Dubey

Akash Dubey is a Law Graduate and works as an Advisor at Enterslice. He is proficient in Legal and Financial Advisory. His expertise in the skills of Legal and Financial Research is an aid to his strengths as an Advisor.

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