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Should P2P Lending be Regulated?

Narendra Kumar

| Updated: Jun 06, 2017 | Category: Peer to Peer Lending

P2P Lending Regulatory

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.

Currently, P2P Lending is the unregulated sector of the Indian economy. However, RBI is expected to release the guidelines on this sector very soon, based on the belief that although the sector is yet to show much gauge and adhesion, there is a requirement of a strict watch on its operations. Talking upon the regulatory framework for P2P lending, various experts are of the belief that there should be a certain cap on the interest rates or the number of funds being traded on such a platform. 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.

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 fulfill 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.

Arguments in Favor of Regulations

The much-anticipated regulations in the field of P2P lending are expected to bring streamlined solutions for the credit-related problems prevailing in the country, as well as strengthen the framework within which the sector will operate.

  • A sound regulatory framework will prevent any disruption in the financial sector;
  • The significance of the online industry and its impact on the traditional banking systems/NBFCs is making it’s highly prudent to regulate the P2P framework;
  • This type of lending strives to meet the credit needs of those sections which are outside the reach of formal banking channels, therefore further initiating the need for regulating the sector;
  • The unregulated sector will turn out to be the breeding ground for all the financial malpractices such as money laundering, black marketing, etc.
  • The term “deposits” have been very comprehensively defined under the RBI Act. The inclusive definition attracts various penalties under the Act in the case of the non-compliances. Therefore, the absence of regulation in the P2P framework may lead to committing an illegality

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.

Conclusion

On the basis of the above-mentioned suggestions and guidelines, RBI may anytime soon come up with its regulatory framework governing the working of these platforms. The framework may also specify that no entity, other than the company shall undertake the activities of P2P lending as individuals, proprietorship, partnership or Limited Liability Partnerships would not fall under the purview of the RBI.

Recommended Article: P2P Lending Structure in India.

Narendra Kumar

Experienced Finance and Legal Professional with 12+ Years of Experience in Legal, Finance, Fintech, Blockchain, and Revenue Management.

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