Peer to Peer Lending

Peer to Peer Lending: RBI Regulation & Licensing Requirement

Peer to peer lending was not regulated in India, until 2017. Looking at higher NPA worldwide, RBI has been under discussion to continue with a well-regulated peer to peer lending business model in India. In this article, we will discuss RBI Regulation and requirements for peer to peer lending.

What is Peer to Peer Lending?

Peer to Peer lending is known as P2P Lending. It is concerned with lending money to individuals or corporates through online services which match lenders with borrowers. P2P lending institutions provide services online which is cheaper than a traditional financial institution. They can run their business on lower overhead.

Under this lenders can earn higher returns as compared to banks whereas borrowers can borrow money at lower rates. It consists of risk related to a borrower defaulting on the loans taken out. Peer to Peer Lending platforms are helping a huge section of borrowers who were rejected or declared unqualified by the banks for loans.

In India, it is concerned with shifting from traditional loaning process which happens with banks & financial institution. It is a modern procedure related to money transaction between lenders & borrowers. It aims at flourishing monetary returns for lenders and to meet economic requirements for the borrowers in an easier way. This type of transaction system follows guidelines.

Peer to Peer Lending: RBI Regulation

RBI^[1] floated the consultation paper for P2P lending platforms in India in April 2016. RBI is expected to start a peer to peer lending license from 1^st October 2017.

According to consultation paper RBI has the power to regulate entities which are in the form of companies or cooperative societies. All such companies shall be required to obtain a P2P lending license from RBI.   In case P2P run by individuals, LLP, proprietorship or partnership, then it will not fall under the purview of RBI. For P2P it is essential to adopt a structure of a company. It is specified by the notification that no entity other than a company can undertake this activity.

As per the definition stated in consultation paper- P2P lending platforms provide unsecured loans. Under this interest rates may be specified by the platform or it can be set by the mutual agreement between the borrower & lender. P2P lending platforms provide the services related to collecting loan repayments and doing a preliminary assessment of the borrower’s creditworthiness.

Peer to peer lending platform allows lenders to directly lend to other people by registering them on the platform by providing their ID and address proof. To transact on the platform they will also provide the bank account details.

After accepting the loan by the borrower, the platform team will confirm the offer and prepare loan agreement document which shall be signed by both lender & borrower. The borrower also submits non-dated cheques as security. The lender makes the online transfer of loan and borrower will pay in equal monthly installments to the lender.

The P2P lending platform provides quick loans on better interest rates. The main advantage to the borrower is that they get lower APR in comparison to those available from credit cards or other traditional streams like gold loans or cash loans.

Peer to Peer Lending: Regulated Framework

The regulated framework would encompass the following regulations stated below:

• Permitted Activity

The P2P platform could be registered only as intermediary and it will also be prohibited from giving assured return directly or indirectly. The main role of the platform which will be limited to bringing the borrower and lender together without reflecting lending and borrowing on its balance sheet. It will also be allowed to opine on the suitability of a lender and creditworthiness of a borrower. It is mandatory that funds will have to move directly from the lender’s bank account to borrower’s account to eliminate the threat of money laundering. It also prohibits the platform from being used for any cross-border transaction.

• Prudential Requirements

It will include a minimum capital of Rs. 2 crores with a prescribed leverage ratio so that the platforms do not expand with indiscriminate leverage. It includes limits on the maximum contribution by a lender to a borrower/segment of activity.

• Governance Requirements

It includes a fit and proper criteria for promoters, directors, and CEO. It may also require the lender to have a brick & mortar place of business in India.

• Business Continuity Plan (BCP)

It is required to put in place adequate risk management system for smooth operations and BCP and back up for the data needs to be put in place since the platform also acts as a custodian of the agreements/cheques etc.

• Customer Interface

The P2P platform will be responsible for the confidentiality of customer data and data security. These platforms may be prohibited from promising of extraordinary returns. Current regulations applicable to NBFCs will also be applicable to the P2P platforms in regard to recovery practice.

• Reporting Requirements

It is required for the platforms to submit regular reports to the RBI on their financial position, complaints, and loans arranged each quarter, etc. The bank may also come out with detailed reporting requirements.

Digital payments are providing a way to shift to a cashless economy. Online P2P lending will open new doors of opportunities as the way the Indian government is pushing SME/MSME policies.

Currently, active P2P startups in India are Faircent, Listbox, Capital Float, Indifi, IndiaMoneyMart, Monaco, Rupaiya Exchange, Capzest and more.

Many countries like China, Australia, Germany, New Zealand, etc. have already regularized their P2P lending norms.

How to get Peer to Peer Lending License from RBI?

For obtaining P2P Lending License, one should apply to RBI. For obtaining such license, the organization should be registered in India as Private or Public Limited Company and as stated above it should have minimum net possessed assets of 2 crore rupees.

It may be noted that the online application is accessible from RBI’s site. Printed copy of the application with supporting documents should be submitted to RBI office.  Once the documents and application is reviewed, the permit shall be provided.

How to Minimize Risk and Maximize Returns on the P2P platform?

In order to minimize risk and maximize return:

• Diversify investments across to get benefit from higher returns.
• Reinvest payments regularly to benefit from the power of compounding.
• Divide overall investment and lend to multiple borrowers within the same category to minimize default.

With these strategies, investors can earn good returns without compromising much on the safety of capital.  For Peer to Peer lending license, you will have to complete all required compliances and requirements as per RBI act for NBFC which means, your Existing P2P lending platform must obtain NBFC Registration with RBI within the stipulated time period.

Conclusion

Financial services with technology assistance are expected to drive Indian Economy. Currently the Peer to Peer lending business is emerged by Fintech Companies in India. In case you wish to know more about this, contact Enterslice.

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