RBI Notification

RBI Tighten Rules on NBFC-P2P Lending Platforms for Transparency

The Reserve Bank of India (RBI) has tightened regulations for NBFC-P2P lending platforms to enhance transparency and compliance and address concerns over violations of the 2017 guidelines.

In instances of non-compliance by certain entities, the RBI issued revised Master Directions (MD), effective immediately, to tighten the rules of P2P lending platforms. The new guidelines specify that P2P platforms must refrain from promoting P2P lending as an investment product, particularly with features such as tenure-linked assured minimum returns and liquidity options.

Brief about Master Direction of NBFC-P2P Lending Platform, 2017

Before understanding the latest guidelines, let’s briefly understand the Master Direction 2017 for the NBFC-P2P lending platform, which was issued by RBI on October 4, 2017, for companies involved in or planning to obtain a Peer-to-Peer lending license to engage in the business of peer-to-peer lending platforms. This RBI’s direction aims to boost confidence in P2P lending by enhancing transparency.

A major challenge for the growth of alternative lending has been limited and inconsistent disclosures related to the parties involved, credit models, and data protection. However, under this master direction, NBFC-P2Ps must provide detailed disclosures to borrowers and lenders, including counterparties, credit scores, loan contracts, data usage and protection, grievance mechanism and platform performance. These measures are expected to promote fair lending practices and foster trust among users of the alternative lending model.

The master direction requires all NBFC-P2P platforms to share relevant credit information with credit information companies on a monthly basis to address concerns about credit risk assessment. This view of a borrower’s credit history will enable P2P lenders to price loans more effectively by considering factors such as repayment behaviour, exposure, and income details. This RBI’s master direction also enhances the perceived safety of the P2P lending platform by mandating a robust financial risk management and anti-money laundering framework. It also encourages the use of modern technology for P2P lending to promote online business models.

Amended Provision of NBFC-P2P Lending Platform

The Master Direction provided specific guidelines on various operational aspects of the NBFC-P2P lending platform. However, it has been observed that some platforms have engaged in practices that violate the directions.

These practices include peer-to-peer lending as an investment product with features like assured minimum returns linked to tenure, offering liquidity options, and, in some cases, functioning as deposit takers and lenders rather than as a platform. P2P NBFCs must meet the NBFC compliance audit requirements to stay ahead in the competition. 

However, to address this violation, RBI has decided to amend certain provisions to ensure proper implementation of the directions. The amended provisions are enclosed below and will take effect immediately except I(f)(ii), which will come into effect 90 days from the date of this circular.

1. Para 6 (1)(iv)

An NBFC P2P is prohibited from offering or arranging any type of credit enhancement or credit guarantee. It must not assume any credit risk, either directly or indirectly, from transactions on its platform because any loss of principal or interest, if any, will be borne by the lenders. Adequate disclosures to this effect must be made to lenders as part of the fair practices code.

2. Para 6 (1)(vii)

An NBFC P2P is prohibited from cross-selling any products other than insurance products, especially those related to the loan.  However, NBFC P2Ps are prohibited from cross-selling insurance products that provide credit enhancement or guarantee.

3. Para 7(2)

A lender’s total exposure to all borrowers across all P2P lending platforms is capped at Rs 50,00,000, provided that the amount lent aligns with their net worth. If a lender’s total lending exceeds Rs 10,00,000 on any P2P platform, then they must produce a certificate from a practising CA confirming a minimum net worth of Rs 50,00,000.

4. Para 8 (1)(iii)

NBFC P2P shall have a board-approved policy in place, setting out the rules for equitable and non-discriminatory matching of lenders with borrowers.

5. Para 8(3)

No loan shall be disbursed unless the lender and borrowers have been matched or mapped according to the Board-approved policy and all concerned participants have signed the loan contract.

6. Para 9

Fund transfers between participants on the P2P lending platform must be conducted through an escrow account system managed by a trustee promoted by a bank. At least two escrow accounts shall be maintained: one for funds received from lenders pending disbursement and another for collection from borrowers.

However, the funds are transferred into the lender’s escrow account, and borrowers shall not remain in these accounts for more than T+1 days. This will come into effect in 90 days from the date of this circular.

7. Para 11(1)(i)(a)

An NBFC P2P shall be required to disclose details of the borrowers, including personal identity with their consent, required amount, interest rates, and credit score as determined by the NBFC P2P.

8. Para 11(1)(iii)(d)

An NBFC P2P shall publicly disclose on its websites the portfolio performance, including the share of non-performing assets on a monthly basis and segregations by age.

9. Para 12(2)

NBFC P2P shall obtain an explicit declaration from lenders stating they understand all risks associated with lending transactions and that the P2P platform does not assure the return of principal or payment of interest. Also, the P2P platform shall not promote peer-to-peer lending as an investment product.

10. Annex VI-2

NBFC P2Ps that choose not to outsource core management functions, including internal audit and compliance functions, pricing of services or fees to be charged to borrowers or lenders and decision-making functions such as determining compliance with KYC norms.

What is the New Provision Added in the MD-NBFC-P2P?

The master direction by RBI, issued on August 16, 2024, has added some new provisions for the NBFC P2P lending platform to maintain transparency. Below is the list of some new provisions which have been added:

1. Para 6(1)(xi)

An NBFC P2P shall not deploy lender funds in any manner other than as specified in the directions.

2. Para 6(1)(xii)

An NBFC P2P shall not utilize one lender’s funds to replace another lender.

3. Para 8 (4)

The pricing policy must be transparent, with the NBFC-P2P required to disclose the applicable fees at the outset of lending. Fees must be either a fixed amount or a predetermined percentage of the principal involved in the transaction.

4. Para 8(5)

Matching or mapping participants within a closed user group is prohibited, whether done directly or through an outsourced agency.  

5. Para 11 (4)

An NBFC P2P shall clearly display its registered name along with any brand name in all customer interfaces.

6. Para 12(6)

The platform must prominently display a caveat on its website or any other promotional material. However, the RBI does not accept any responsibility for the correctness of any statement.

Impact of the Master Direction on the NBFC-P2P Lending Platform

The Master Direction by RBI to tighten rules on P2P lending platforms introduced stricter regulations aimed at ensuring the integrity and transparency of this platform. By explicitly prohibiting practices such as the misuse of lender’s funds, cross-selling products unrelated to loans and promoting peer-to-peer lending as an investment with guaranteed returns, the RBI seeks to protect both the lenders and borrowers from potential risks.

 It also clarifies the responsibilities of NBFC P2P platforms in managing funds and ensuring fair practices, enhances the PEP lending platforms, mitigates risk, and safeguards participants by strengthening the overall trust in the system of P2P lending.

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Conclusion

In conclusion, the RBI’s Master direction to review the NBFC P2P lending platform marks a significant step towards enhancing transparency and accounting in the lending sector by implementing stricter regulation and clearer guidelines; the RBI aims to address previous violations and protect both lenders and borrowers.

Understand the new RBI guidelines and how they impact your P2P lending operations by visiting our website www.enterslice.com and ensures transparency in your P2P lending platforms. Also, we ensure hassle-free NBFC registration and meet your compliance needs effortlessly with a time-saving approach.

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