Peer to Peer Lending RBI Regulation & Licensing Requirement
Peer to peer lending was not regulated in India, until 2017. Looking 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 tell Peer to Peer Lending RBI Regulation and requirements.
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. Peer to Peer lending institutions provides 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 risk related to borrower defaulting on the loans taken out. Peer to Peer Lending License platforms 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 transacting 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 floated the consultation paper for peer to peer lending platforms in India in April 2016. RBI is expected to start a peer to peer lending license from 1st 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 nondated 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 other traditional streams like gold loans or cash loans.
The regulated framework would encompass following regulations stated below:
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.
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.
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.
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.
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 the way to shift to a cashless economy. Online P2P lending will open new doors of opportunities as the way 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.
Minimize Risk and Maximize Returns on the P2P platform
- 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 lending license, you will have to complete the all required as per RBI act for NBFC. Means, your Existing P2P lending platform must obtain NBFC Registration with RBI within the stipulated time period.
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