Peer to Peer Lending

P2P Lending Structure in India

The P2P Lending License is a basic requirement to use such online platform. Both Lenders and Borrowers need to register themselves. Here we discuss P2P Lending structure in details.

What is P2P Lending Structure in India? How will RBI Regulation help P2P Companies?

Peer to Peer (P2P) is an alternative lending method of debt financing. It caters online platform to borrowers and lenders. The Reserve Bank of India (RBI) has recognized P2P companies as Non-Banking financial companies (NBFC).

What is P2P lending?

P2P Lending is a method of debt financing. Which is online services permitted individuals to borrow and lend money without the use of an official financial as an intermediary.

The registration is a basic requirement to use such online platform. Both Lenders and Borrowers need to register themselves.

What is the Registration Process?

All Companies wants to undertake a P2P lending platform shall obtain the certificate of registration as an NBFC-P2P from RBI.  Existing NBFC-P2P^[1] shall comply with the provisions within the stipulated time.

In addition to registration following conditions to comply with:

The Company shall,

• Incorporated in India
• Necessary technological, entrepreneurial and managerial resources
• Adequate capital structure
• Promoters and Directors shall be fit and proper
• Submission of Business plan and Security of Information Technology system plan.

Net-owned fund:

The RBI^[2] has said that every company seeking registration should have a net-owned fund of at least Rs 2 crore.

It seems that RBI is only welcoming serious players who have their skin in the game and discourage fly-by-night operators. This will, in the long run, protect, Lender and Borrower interest and increase the credibility of the industry.

Leverage Ratio:

RBI has probed to maintain Leverage Ratio up to 2. The leverage ratio is, in reality, the ratio of debt to owned capital and not the lending on the platform.

Escrow accounts:

NBFC shall have an Escrow account to undertake all the fund transfer between participants on a P2P lending platform. The nominated trustee will be responsible to operate an escrow account. Company shall open minimum 2 escrow accounts, one for funds received from lenders and pending disbursal, and the other for collections from borrowers, shall be maintained.

Faircent.com was the first platform in India to launch Escrow accounts, under the trusteeship of IDBI banks, way back in February 2017. Ever since the launch of an Escrow account, financial transactions on the platform have become faster, smoother and more secure.

Cap limit on Lending and Borrowing Amount:

The RBI said that the aggregate exposure of a lender to all his/her borrowers at any point, across all P2Ps, should be capped at Rs 10 lakh.

The aggregate loans taken by a borrower at any point of time, across all P2Ps, has also been capped at the same amount.

The exposure of a single lender to the same borrower, across all P2Ps, shall not exceed Rs 50,000.

The maturity of the loans is restricted for up to 36 months.

This guideline does seem restrictive as diversifying investments across multiple borrower categories is the best way for lenders to maximize their returns on P2P lending platforms. To that extent, the limit is too low.

The P2P lending business model depends on both lenders and borrowers, and, if sufficient funds are not available for lending, consumers will be driven to the unorganized sector, leaving them vulnerable to exploitation. This defeats the entire purpose of financial inclusion that P2P lending contributes to. However, we are hopeful that as more clarity emerges over the next few months and existing platforms engage with RBI, this limit will either be revised upwards or removed.

Operation requirements:

All NBFC-P2P shall have Board approved policy containing the provisions of eligibility criteria and pricing norms. Board approved policy shall also set out rules for matching lenders with borrowers in an equitable and non-discriminatory manner.

NBFC-P2P are permitted outsource any of its activity subject to confirming actions of its service providers including recovery agents and the confidentiality of information.

NBFC-P2P shall also put in place the Board approved the policy to address participant grievances/complaints.

There should be a loan contract between the lender and borrowers duly signed by both.

Submission of data to Credit Information Companies:

Every NBFC-P2P shall become a member of all CICs and submit data (including historical data) to them. This should help reduce default rates and bring more credibility to the system.

Overall, the regulations are progressive and a positive move. They will undoubtedly help online P2P lending platforms break forth into the mainstream financial market.