Peer To Peer Lending (P2P) and Crowd Funding in India

Ashish M. Shaji

17 Dec, 2020

P2P lending and Crowd funding are terms that are slowly but steadily growing in India. It is yet to gather momentum as payments banks or mobile wallets. RBI has started analyzing the model and therefore in this article we shall look at these two concepts.

Overview on P2P Lending and Crowd Funding

Following are the points on P2P Lending and Crowd Funding:

• Peer to Peer lending, also known as P2P Lending, is a method of debt financing that enables individuals to borrow and lend money without the use of an official financial as an intermediary through online services Peer to peer.
• In India, P2P Lending is gaining traction at very fast pace and slowly becoming a very attractive investment option for investors. RBI has already taken an initiative of this innovation and come up with a consultation paper to regulate this sector. Very soon it is expected that RBI will publish procedure for Peer to peer lending license in India.
• These lending platforms also called as ‘social lending’ or ‘crowd lending’, and are designed in a way that they are beneficial to both lenders and borrowers and are driven by innovative, cutting-edge digital technology. It is also known as crowd lending, many peer-to-peer loans are unsecured personal loans, though some of the largest amounts are lent to businesses.

Secured loans are sometimes offered by using luxury assets such as jewelry, watches, vintage cars, fine art, buildings, aircraft and other business assets as collateral. They are made to an individual, company or charity. Other forms of peer-to-peer lending include student loans, commercial and real estate loans, payday loans, as well as secured business loans, leasing, and factoring.

Major types of Crowd funding

The routes that could possibly be explored under Security-Based Crowd funding, are the following:

1. Equity-based Crowd Funding (EBC) – raising equity through a crowdfunding platform
2. Debt based Crowd Funding (DBC) – raising funds by issuing debentures or debt securities through a crowdfunding platform
3. Fund based Crowd Funding (FBC) – raising funds for pooling under an Alternative Investment Fund (AIF) through a crowdfunding platform.

Consultation Paper on Peer to Peer Lending

The Reserve Bank of India (RBI) had floated a consultation paper in April 2016 on the Indian P2P lending that has been taking roots in India. RBI has proposed to register the P2P lending Platforms as Non-Banking Financial Companies (NBFCs).

Further, according to the document, the proposed regulation is proposed to encompass the following:

• Permitted Activity under Peer to Peer Lending License 

1. The Platform could be registered only as an intermediary i.e. the role of the Platform would be restricted to bringing the borrower and lender together without the transaction getting reflected on its balance sheet.
2. The Platforms will be prohibited from giving any assured return either directly or indirectly.
3. The Platforms will be allowed to opine on the suitability of a lender and credit-worthiness of a borrower.
4. Adequate regulations on advertisements will also be put in place and it will also be mandated that funds will have to necessarily move directly from the lender’s bank account to the borrower’s bank account to avoid the threat of money laundering.
5. The guidelines would also prohibit the platforms being used for any cross-border transaction in view of FEMA provisions relating to transactions between residents and non-residents.

• Prudential Requirements for Peer to Peer Lending in India

The prudential requirements will include a minimum capital of INR 2 crore with a prescribed leverage ratio to avoid indiscriminate leverage on the Platforms.

• RBI Requirements for Peer to Peer to lending business in India

1. The guidelines will include a criterion for promoters, directors, and the CEO^[1], with reference to a financial sector background.
2. The guidelines require the P2P lender to have a brick and mortar place of business in India, whereas the management and operational personnel of the Platform would need to be stationed within the country.

• Business Continuity Plan (BCP)

1. The Platforms need to put in place adequate risk management systems for its smooth operations.
2. BCP and backup for the data need to be put in place since the Platform also acts as a custodian of the agreements/cheques etc.
3. In case of failure of the Platform to continue its operations, it should have a ‘living will’ or alternative arrangement in the form of an agreement for continuation of its operations.

• Customer Interface for the P2P lending platform

1. Confidentiality of the customer data and data security would be the responsibility of the Platform
2. Mandatory transparency in operations, with adequate measures for data confidentiality and minimum disclosures to borrowers and lenders through a fair practice code.
3. The Platforms for P2P lending are forbidden from promising or suggesting a promise of extraordinary returns, which implies some form of guarantee of returns to lenders.
4. The current regulations applicable to other NBFCs will be made applicable to the P2P platforms in regard to recovery practice.
5. P2P platforms are expected to have a proper grievance redress mechanism to deal with complaints from both lenders and borrowers and require reporting to the Board.

• P2P Lending: RBI Reporting Requirements

The Platforms will need to submit regular reports on their financial position, loans arranged each quarter, complaints etc. to the Reserve Bank. The Bank may come out with a detailed reporting requirement.

Conclusion

P2P Lending and Crowd funding provide a lot of benefits however these are offered through online portals, it is vital to verify the authenticity and reliability of the website before you move forward for transacting. In case you need more insight into these concepts, contact Enterslice.

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