Regulation of Peer 2 Peer Lending (P2P)

Ashish M. Shaji

14 Oct, 2020

Peer 2 Peer Lending (P2P Lending) is the new player in the financial market of loans and advances. It is an online platform where borrowers of funds meet the lender of funds. The platform acts as the mediator involved in the task of ascertaining the credit rating of the proposed borrowers by charging fees at a flat rate from them and also providing documentation services, financial advice, etc. Lenders can earn interest higher as compared to bank savings and borrowers can obtain funds at an interest rate lower than banks. In this article we will look at Regulation of Peer 2 Peer lending.

RBI Regulation

The increasing demand for finance from various sections of society cannot be catered to by banks and NBFCs alone, hence the importance of the online platform for lending and borrowing money will gain much importance over the time.

In the P2P lending some structure is brought by the Reserve Bank. The P2P entity that brings lender and borrower together, can’t offer any guarantee on loan. RBI regulation provides that P2P shall neither provide nor arrange any credit enhancement or credit guarantee.

As P2P Lending arises as to the next level of online lending in a credit famished country like India, RBI is also learning to keep an eye on other digital innovations happening in the NBFC world. The RBI is worried about certain malicious individuals having surplus cash, who should make use of such a platform for lending money at higher interest rates. This will eventually lead to mishaps in the financial market and exploitation of small borrowers.

Therefore, there is a need for strict vigilance along with the proper space to grow and fulfil the increasing demand for funds. For the same reason, RBI has issued a consultation paper in April 2016 on the Indian P2P lending framework that has been taking root in India. A Gurugram based company, Fair Assets Technologies India engaged primarily in the business of Peer to Peer Lending and has diversified in the area of gold loans too.

RBI guidelines for P2P players

The P2P players are required to follow the following guidelines as per regulation of peer 2 peer lending:

• Undertake due diligence on participants;
• Undertake risk profiling and credit assessment of borrowers and disclose to lenders;
• Render services for loan recovery;
• Undertake loan agreements’ documentation;
• Aggregate exposure of one lender to all borrowers to 50 lakh across P2P platforms;
• Lenders investing beyond 10 lakh rupees across P2P platforms would produce a certificate from practicing chartered accountant certifying a minimum net worth of 50 lakh rupees;
• Aggregate loans by a borrower across P2P platforms subject to 10 lakh rupees;
• Exposure of a single lender to one borrower capped at 50000 rupees across P2P platforms;
• Maturity of loans maximum of 3 years.

The Regulatory Framework

The proposed regulatory framework may aim to cover the following aspects of the P2P lending:

1. Permitted Activity– the role of the platform will be that of an intermediary, bringing the borrower and lender together in a way that non-compliance with the section 45 S of the RBI^[1] Act relating to the “deposits” is not being attracted by any of its activities. As an intermediary, the platform shall not assume any guarantee of payment, directly or indirectly.
2. Prudential Norms– A minimum capital of INR 2 Crores shall be required for a P2P lending platform to get registered as an intermediary with the RBI.
3. Governance Requirements– There shall be fit and proper guidelines for the conduct of promoters, directors, and CEO. The guidelines will also require the business to hold a physical place in India.
4. Continuation of the business-The guidelines shall also provide provisions for the alternative arrangements in case of the failure of the business.
5. Customer Interface– While providing the credit scoring for the proposed borrowers, the platform shall seek to maintain the confidentiality of the information provided by the customers. The platform shall not resort to making any promise of extraordinary returns to lenders.
6. Reporting Requirements– Regular reports in respect of financial position, loans, complaints are submitted to the RBI by all the P2P lending platforms.

Advantages of P2P lending

There are a number of benefits from this form of lending such as:

• High returns to investors

P2P lending platforms are profitable for lenders as well as investors as investors can earn higher return on investments and the borrowers can avail loans in lower interest rates.

• Diversification

This form of lending offers investors with a huge variety of options to invest their capital.

• Transparency

In these platforms, investors have information concerning the background of business and one can know where their money has gone.

Conclusion

The P2P lending is regulated by the Master Directions for NBFC P2P lending platform. The conditions laid down by the RBI should be adhered to by the P2P lenders and borrowers.

Read our article: Peer to Peer Lending Business: Pioneering the Fintech Industry