Brief overview of Peer-to-Peer (P2P) lending P2P, its abbreviation as Peer to Peer lending, has become an important part of the Indian economy. There seems with a possibility rise in loan disbursals within the past years. The Peer to Peer is underway in such a manner that the entities prefer to raise debt. The categorization of peer-to-peer business by the RBI as a Non-banking company (NBFC) after such a long time. At a global level, the P2P lending platforms give rise to the Fin Tech services and such rise needs to be scrutinized. This is why the USA and China have laid different regulations for the functioning of such platforms. P2P lending platforms in Britain were gone into inspection and categorized as a loan-based crowdfunding sector by the Financial Conduct Authority. Crowdfunding generally refers to those organization groups of people either any businesses that may be a startup, easily raise money using different online portals so as to finance or re-finance their business activities. An individual as well as businesses can easily raise money. In Australia, the Securities and Investment Commission coined as Market Place Lending for those P2P lending platforms and states it as a type of arrangement under which retail or wholesale investors can invest their money(for earning) further used in the market for lending to borrowers or businesses. This market lending engages the usage of online platforms such as websites where the loan requests from the end of borrowers are made generally. In the United States of America, P2P lending platforms are regulated under the Securities Act, of 1933 and recognized as a sale of securities. While in China, these lending platforms cheated the public for a long time. Acknowledging all these incidents globally, the Reserve Bank of India regulated the P2P lending businesses in the country and thus formulated a Master Direction issued on the 4th of October 2017 for peer-to-peer lending business. What is P2P Lending? Accordingly Para 4(1) (VI) of the RBI direction, NBFC-P2P refers to a non-banking financial institution affiliating the business of peer-to-peer lending. The P2Plending platform is defined as an intermediary that provides the loan facility using the online process as mentioned in Para 4(1) (IV) of the RBI directions. NBFC-P2P (peer-to-peer lending Platform) is a kind of non-banking financial company that carries the business or service of lending loans using an online platform facilitating both the willingness lenders and borrowers. Such kind of NBFCs are not permitted to accept deposits or lend money on their own. It is simply developed only to moderate the transaction between the lenders and borrowers. NBFC-P2P offers services to match the right lender with the right borrower using the due diligence process on online platforms. It also offers some kind of additional services such as loan recovery services, credit assessment, profile verifications, and many other related services, etc. Importance of P2P lending in the modern financial landscape. The P2P lending business is growing and expanding rapidly in the Indian market because of its following operational qualities:- Easy Loan Request Process Low Cost of Interest Rate Help to fund MSME (Micro and Small Sized Enterprises) Eliminate Middlemen and unDocumentwork. Held negotiation between lender and borrower. Peer-to-peer lending business can also be known as crowdfunding or marketplace lending, either regulated or unregulated, having its remarkable presence in fast-growing developing or developed countries worldwide, with growing its market size. In India, P2P lending has evolved and revolutionized parallel to the advent of financial technologies. The advancement in technology helped financial services to play a crucial role in the Indian economy because of its prominent requirements, low costs, and disintermediation. The Commercial bank's credit facilitation and lending services are over the counter and perhaps, it consumes an unaffordable time duration and unnecessary cost to obtain loans from commercial banks. Moreover, P2P lending plays a vital role in the modern financial landscape, as it’s capable of offering alternative financing opportunities for undeserving individuals and small businesses who may not have access to traditional loans. P2P lending enhances financial inclusivity by connecting both the borrowers and lenders online by eliminating the middlemen. It empowers individuals to take care of their financial profiles, helps to make informed decisions, and supports economic growth by stimulating innovation and entrepreneurship. However, the P2P is creating a competitive atmosphere among the financial entities leading to fair competitive interest and terms for borrowers. P2P is beneficial not only to the individuals that it encourages traditional banks to adopt trending P2P lending processes thus enhancing their lending process. P2P has the potential to disrupt traditional banks along with the ability to mitigate the gaps in the financial system. Usually, Individuals and SME businesses are looking for an alternative financial landscape in terms of market and services. In India, the financial market is believed to reach the value of $ 4-5 billion market till 2025. However, the peer-to-peer lending market is regulated by the Reserve Bank of India and duly identified as Non- a non-banking financial company. P2P companies are duly registered under the RBI to offer the services of Peer-to-peer lending as an online platform. Compliance and Regulation The Reserve Bank of India regulated the P2P lending businesses in the country and thus formulated a Master Direction issued on the 4th of October 2017 for P2P lending business. RBI is determined to promote and encourage a principle of fair practices code among the NBFC-P2P lending platforms in order to safeguard the interest of lenders, borrowers participants, etc. P2P Lending Registration Eligibility Criteria for NBFC-P2P- The RBI directions specify the guild line for facilitating the P2P lending services requires the interested NBFCs to get registered under the NBFC-P2P lending Platform. NBFC-P2P requires a net owned fund value of above INR 2 crores while making a grant to operate as a P2P lending platform from the RBI. The said net-owned fund along with its source and promoter details is to be required before the time of issuing the certificate from the end of RBI. The RBI has only authorized the NBFC to perform the business of lending platforms. All NBFC-P2P requires a certificate of authorization from the end of RBI in case they are going to start or already have started the business of lending services. Process for Drafting the Application for Seeking P2P Permission from RBI The RBI in its directions for the NBFC-P2P has already informed the guild lines for interested NBFC while seeking a grant to act as a P2P lending platform as follows- NBFCs are required to specify the detailed information related to their proposed directors including their shareholder's details in a prescribed format. NBFC are required to specify the sources of such proposed shareholders of directors acquiring shares in the concerned NBFC-P2P Directors are required under the NBFC-P2P to give their declaration on the proposed shares mentioning the fact of not being associated with any other not incorporated body accepting deposits. It is mandatory for all directors along with the shareholders to provide their declaration letter for not being associated with any type of company previously, whose request for a certificate has been duly rejected from the end of the RBI. It is most important for the directors including the shareholders to specify in the declaration that they have not been previously engaged in any type of criminal offense or having on the pendency of any type of criminal or civil nature of cases including such possible proceeding under 138 section of Negotiable Instrument Act, 1881. A report from the end of the Banker’s required for NBFC-P2P, on the proposed directors or shareholders. After complying with the above details in a prescribed form, the application for the certificate must be given to the Regional Office of Non-banking Supervision of the bank where the company is registered. Registration Guidelines Process for registration as a P2P lending Platform- According to the RBI directions, all interested NBFC-P2P are required to apply an application for seeking a certificate from the Department of Non-banking Regulation, RBI. RBI will grant the permission for setting up and operating that P2P lending platform as an in-principle form of approval as RBI deems it to be satisfying after seeing the required conditions are being fulfilled accordingly. Such approval in terms of in-principle form from the RBI will be valid for a period of the next 12 months from the date of its approval. Such entities applying for the prospective P2P lending platform are not required to wait for a period of 12 months. The RBI is providing tenure of 12 months to these entities for settling up in case they are ready to set up easily in months and fully comply with all the other required guidelines established by RBI. Then entities can approach the RBI and share their report on compliance, if the RBI deems to be satisfied with the compliances, then a grant of in-principle form of approval will be awarded to them. They could further commence their business as an NBFC-P2P lending platform, etc. The Reserve Bank of India is capable in some situations of revoking or canceling the permission of NBFC-P2P lending platforms especially when the concerned NBFC-P2P has opted to terminate or stopped the commencing of peer-to-peer lending business in India or In case the concerned company has not complied with the rulings or directions specified by the RBI to comply for being an NBFC-P2P lending platform, or, In circumstances, where the companies are not eligible to hold the position of NBFC-P2P lending Platform, or, Either the concerned NBFC Company itself, fails in complying any kind of direction specifically issued by the bank or has not yet maintained the records of accounts, either publish or disclose their financial status in accordance to comply with any law or issued direction by the bank itself. Or, if the company fails to offer or furnish its financial books of accounts along with the other necessary Documents for inspection at the time of demand by the bank. In all these situations, the RBI is authorized to cancel the certificate of the NBFC-P2P lending platform, etc. Permissible Business Activities of NBFC-P2P Lending Companies In India- P2P companies are only allowed to facilitate an online platform or online marketplace to the participants (lender and borrowers) in the P2P lending process. P2P is required to conduct due diligence on participants of the lending platform. P2P companies must conduct the credit assessment process analyze the risk portfolio of borrowers and disclose facts to concerned lenders. P2P companies are required to obtain consent from the participants to access the credit information for lending purposes. P2P is required to perform the Paper works and other paperwork works including the loan agreements and legal papers for lending purposes. P2P companies can offer their assistance in the loan disbursement process and further repayment of the loan amount. P2P companies can offer loan recovery services for loans originating on the same lending platform. Allowed to store and keep the records of their business activities including the participants within India. Strictly Prohibited Acts for NBFC-P2P Lending platform or company NBFC-P2P companies are strictly prohibited from accepting deposits as per the RBI Master guidelines. NBFC-P2P companies are debarred from operating the lending business on their own. NBFC-P2P companies are not allowed to arrange or provide credit or guarantee services. NBFC-P2P companies must not hold a balanced sheet having the records of the disbursed loan amount or credit of the lenders or the repayment made by the borrowers. NBFC-P2P companies are not allowed to transit a cash transaction, rather funds must be transferred using the bank's accounts or online process only. NBFC-P2P companies are not allowed to conduct a cross-sale of products except for loan insurance products. NBFC-P2P are prohibited from the International flow of funds. Limitations of Transaction on NBFC-P2P Lending Platform NBFC-P2P Platforms are required to adhere to the following RBI directive norms issued under the Master Direction guideline- It is mandatory for NBFC-P2P Company to maintain a leverage ratio not exceeding 2. The limit decided by RBI in terms of lending on P2Plending platforms for special lenders under subparts 2 and 4 of its prudential norms, is that a lender is not authorized to lend more than INR 10 lacs on all P2Plending platforms and is restricted with the value of lending to a single borrower is INR 50,000 on all such platforms, etc. The same condition will be applicable for the borrowers under the specified subpart 3 of the RBI Prudential norms that a sum, of not more than INR 10 lacs can be borrowed by a borrower using all the P2Plending platforms. A borrower is only allowed below INR 50,000 amount to be borrowed from a single lender at a time. The maturity period of a loan linked to a P2P lending platform should not exceed the 36-month tenure. Compulsory obligations from the end of Participants- It is required by the RBI directive that the concerned participants are mandatorily engaged in an agreement where the terms and conditions need to be specified along with their consent among the borrowers, lenders, and the NBFCs-P2PPlatform. The P2Pplatforms are not authorized to disburse the loan amount until the individual lenders approve the borrower's request and the concerned participant has not signed the agreement of the loan. Moreover, there will be clarification of the process will be done between the lender and borrower and how the loan will be executed accordingly. However, the identity of the lenders will not be disclosed to the borrowers. Time of Deposit the Lender Loan Amount- Accordingly, the lender will be allowed to deposit the lender loan amount prior to the time of registration or getting engaged in any lending agreement between the borrowers. Under this, the lender is bound to deposit the sum early in order to avoid unnecessary delay in the lending process. Interest Rate to be decided- The RBI under its directive of P2Plending has specified the process of deciding the interest rate of lending on the basis of the borrower’s identity, his interest rate desire, and the credit score. Moreover, the lender is aware of the personal identity of the borrower, and his desired interest rate including the credit score from the end of the NBFC-P2P platform. The borrower will specify his requirement for a loan at the time of loan request and the interest sought etc. Meanwhile, the concerned NBFC-P2P platform will conduct bidding to sort out the rate of interest between the lenders and when the interest rate is near less or more or equal to the desired borrower rate of interest, will stop the bidding process. Operational Compliance for NBFC-P2P Lending Platforms Operational Policy & Framework NBFC-P2P is required to undergo a board-approved policy where the qualifying criteria of being participants with rules for matching lenders with borrowers using non-discriminatory manners are duly prescribed. The platforms need to clarify their costs of services. The RBI under its directions has made liable the NBFC-P2P platforms regarding the ongoing activities on the platforms along with the acts of their recovery agents. The RBI has made responsible to the NBFC-P2P platforms for the confidentiality of information pertaining to the participants. Etc. The platforms are bound to display a warning for the end of RBI that “RBI is not responsible for the correctness of any kind of statements or representations either made or expressed by the NBFC-P2P platforms or provide any guarantee for the repayments of lending loans on the same P2P platforms.” NBFC-P2P should address the conflicts of the customer’s grievances or complaints during the entire lending process before or after and resolve them accordingly. NBFC-P2P is required to set out the maintenance of fit and proper criteria of their directors. Appropriate Information System and its maintenance NBFC-P2P is required to develop an adequate and proper infrastructure compromising the modern advanced technological tools to conduct their business operations. Advanced technological tools must be capable of disseminating the information and other Documents related to both lenders and borrowers in an effective and secured encrypted manner. NBFC-P2P must have its own board-approved policy for the security and maintenance of information and technology systems to protect them from unauthorized usage. Information shared with CICs companies (Credit Information Companies) NBFC-P2P is more likely to disclose the limitation of data or information uses and its protection regards. NBFC-P2P is bound to mention their grievance redressal mechanism on the business website and is also required to publish the portfolio performance of their non-performing assets/shares on a regular monthly basis, etc. The NBFC-P2P is required to be a member of credit information companies (CIC) and will publish all the credit prehistory data along with the present credit score. The NBFc-P2P are required to maintain the records of their borrower credit information Disbursal of Loan through the Platforms: The P2Pplatforms are not authorized to disburse the loan amount until the individual lenders approve the borrower's request and the concerned participant has not signed the agreement of the loan. RBI on Escrow Account & Transfer of Funds for NBFC-P2P lending platforms Escrow accounts refer to those accounts where a third party receives and disburses an amount, especially for the primary transaction parties based on the agreed terms and conditions by the transacting parties Under the RBI direction, the trustee must be appointed by the same bank that maintains the escrow account. The trustee is authorized to give instructions to the bank and directly handle the operations of the escrow account on the behalf of lender, borrower, and platform during the funds transfer mechanism. The P2P lending platform is required to hold at least two escrow accounts which will be operated by the trustee. The two escrow accounts are required in order to keep the funds received from the end of lenders for disbursal of amount while the other one is required so as to keep the collection of funds received from the end of the borrowers, etc. NBFC-P2P Reporting Required Under RBI The P2P lending platforms are required to submit the following statements before the Regional office within a period of 15 days after the completion days of the quarter. NBFC-P2P should mention their statement including the fact of number and the amount with respect to the loans such as disbursed amount during the quarter, closed amount during the quarter with the outstanding amount at the beginning with the ending of the said quarter with the number of borrowers and lenders outstanding as the end of the quarter. NBFCs P2P are also required to summarize the number and the amount available in the escrow account, along with those amounts divided into funds separately received from the end of lenders and also the funds received from the borrower side, etc. NBFC-P2P is required to mention the number of the received complaints from the end borrowers and lenders and must specify the resolved complaints from the beginning and end of the quarter. Report if change in Management and Auditors The RBI in its direction specified that the NBFC-P2P platforms are required to inform within a period of 1 month from the date of occurrence of such changes such as change in address, telephone number, or fax number of the registered NBFC-P2P office. In case the name and address of the auditors of the NBFC-P2P have changed and if the specimen signatures of the duly authorized to sign on the NBFC-P2P behalf might be changed. In all such circumstances, it has been mandatory for the NBFC-P2P to inform on an immediate basis to the Immediate Office of the non-banking supervision of the concerned jurisdiction of the bank. Approval from RBI for NBFC-P2P Conditions when NBFC-P2P needs prior permission from RBI The RBI has specified in the directions for NBFC-P2P on Para 16 that the prior approval became mandatorily for NBFC-P2P to be taken- In case any allotment of shares in aggregate holdings of any individual or group gets equivalent to 26 percent along with the more of the paid-up capital of the NBFC-P2P, either any acquisition of an NBFC-P2P that includes any progressive increase over a period of time that results in transferring of such shareholdings, or its acquisition or 26 percent or above equity paid up capital of the NBFC-P2P requires the NBFC-P2P to take prior approval from the RBI. In case there are some managerial changes in the NBFC-P2P management of more than 30 percent of its directors excluding the independent directors, then NBFC-P2P requires to have prior permission from the RBI, etc. How do P2P lending companies work? P2P lending companies work on the basis of their platform. Usually, we can simplify it in such a manner- Find yourself if you are qualified for a P2P lending loan as per your choice. Apply and submit a P2P loan application by providing your basic financial information to scrutinize based on your credit report. Wait till your loan request application gets approved. If your application gets approved, then the concerned lenders of the same platform will review your loan request, either to fund you or reject it. As your loan request gets fully funded, soon you may get an electronic funds transfer for the requested loan amount. You will repay the loan EMI as per the terms and conditions of the loan. Your paid payment will be further given back to the concerned lenders. Basically, the Peer to Peer lending works with the intent to connect both borrowers and lenders, who are required to borrow loan amounts or make profits on investments respectively. Borrowers under the P2P lending platform are more likely to submit their loan request on the lending platforms and further, the investors review and compete the loan exchange for interest, if found appropriate otherwise may reject it accordingly. From the start of the loan request till the repayment of the loan amount, the P2P platforms are used to manage the whole process, such as rating the creditworthiness, loan servicing, repayments and collections, etc. Firstly, it is mandatory for the investor to create a profile on the P2P lending platform and transfer the funds which will be further distributed in the form of loan amount. A loan request applicant submits their financial information which receives a risk rating and further this assessment will determine the rate of interest which a borrower needs to repay after the loan amount. Then the peer-to-peer lenders are free to select from different loan offers and opt for the further which have an accepted risk-reward ratio. As the loan amount gets funded, the borrowers are going to pay the interest amount to the lenders as per scheduled durations. The peer-to-peer lending platform takes care of all such loan processes and its disbursement of amount, etc. Market Size, Funding, and Growth of Lending Industry Recent Reports state that the P2P lending industry will continue its upward growth with increasing disbursements, with a promising future for the industry. As digital lending companies emerged within India, the growth of CAGR was 39.5 % over a span of 10 years. According to the India Infoline Limited reports, the digital lending industry has received investments of more than USD 1 billion, and it is believed to grow to a whopping USD 515 billion by 2030. The digital lending space is spurred by models like P2P lending, MSEM financing, and short-term credit. Apart from these, the rise in BNPL apps has also helped in the growth of the lending landscape. In India, the digital lending industry is growing rapidly because the lending companies have the availability of huge amounts of consumer data and the lending space is providing better margins other than the business lending models. The size of Indian lending in the market is set to grow from USD 38.2 billion which was in the year 2021 to approx. USD 515 billion by 2030, with a compounded annual growth of approx. 33.5 %. However, during the covid-19, the industry has suffered lenders default rate of 10-15%. In funding prospects, IIFL reports submit that the fintech industry has grown rapidly in recent years with a total funding value of $39 billion in 2022. Meanwhile, the funding growth has declined approx. 40% in 2022 involving the global factors lie-wise the slowdown of the global economy and the Ukraine war. In FY2022, this industry showed a total deal of 476. Indian startup companies ecosystem, see another record year in terms of ventures that received private capital as per IIFL reports. Accordingly, the data of IIFL, submits that India ranked third in terms of fintech firm’s approx. 9646 fintech companies, the first one is the US which has 31,950 companies, and the UK which has 12,787 fintech companies. It is expected by reports, that the Indian fintech industry will reach the $1 trillion mark with $200 billion in terms of revenue growth by 2030. The size of Indian lending in the market is set to grow from USD 38.2 billion which was in the year 2021 to approx. USD 515 billion by 2030, with a compounded annual growth of approx. 33.5 %. Subsequently, the Wealth-Tech companies are likely to grow from $20 billion in 2021 to $237.4 billion by 2030, at a CAGR value of 31.6%. Meanwhile, the InsureTech Industry will reach beyond $88 billion by 2030, with a CAGR value of 33.7%. Also, the Neo-bank sector which records a five-fold increase in terms of funding in 2021, is expected to grow at $215 billion by 2030. The PPI transactions in FY21 were volume at 493.92 crores and reached 658.12 crores during FY22 and FY23 to 746.67 crores. The total volume of PPI transactions has grown from INR. 1.98 trillion In FY22 to INR 2.94 trillion in FY22 and recorded with a dip to INR 2.87 trillion in FY23. During FY22, the funding in these sectors declined at a rate of 40% because of the funding winter that relates to the amount of money being funded into these sectors. As per the IIFL reports, in respect of funding in startups, has remained flat for three years, from 2017 to 2019, and only picked up in 2020 and further surged to an all-time high during 2021. Meanwhile, the year 2022, has steep declined in the number of funded startups. Reports suggest that more startups have been funded during the funding winter. It was more than 60% of the total deals done in 2022 during the early stage of startups, but it was not more than 45% in 2021. P2P Market Place from 2022 to 2032 During the year 2021, the marketplace value for P2P lending companies was revenue at a total of US$ 1,078.0 million and likely to reach beyond US$ 5.1 billion by 2032, with a CAGR value of 15.5%. As per the reports of FMI, the global P2P marketplace is about 20% of the e-commerce Platform. Comparing the P2P market place 2017 to 2021(demand) & 2022 to 2032(forecast). The P2P marketplace demand is expected to grow at a CAGR rate of 15.5% between 2022 to 2032 with a comparison to 2017 to 2021 a rate of 13.7% CAGR. While the global P2P marketplace is expected to grow its revenue from US$ 1.2 billion (2022) to US$ 5.1 billion (2032). Country- Insights P2P Marketplace Market in India High Adoption of Online payment gateways in India will boost sales India is among the huge users of smartphones and the government is also launching some digital hardware projects to support 4&5G networks and create opportunities to increase digital payment volumes. India has accounted for nearly 44% of South Asia P2P lending and this will continue in the future. Top Leading P2P Companies in India LenDen CLub Mr. Bhavin Patel founded the LenDen Club in 2014, and it the one of India’s fastest-growing P2P lending platforms. It boasts a robust algorithm capable of performing fractional investments and ensuring minimum risks on your investments. It provides an average return of 11.95% per annum. It caters to more than a million customers with over 19,000 pin codes. Faircent In FY-21, Faircent had more than 2 lacs, lenders on its platform, thus securing a NBFC-P2P license from RBI. In the year of 2013, it was established by its founders Rajat Ghandi, Vinay Mathews, and Nitin Gupta. It was seen during the pandemic that fair cent has eased liquidity-related stress on borrowers. It provides an average return of 20% per annum for some investments. Lendbox Lendbox is common for more than 50k investors and 5.4 lacs registered owners. Ekmmeet Singh, Bhuvan Rustagi, and Jatin Malwal laid its foundation in 2015. It generates up to 16% annual returns by lending to borrowers. Lendingkart In 2014, an ex-banker Mr. Harshvardhan Lunia founded LendingKart. From its initial days of operations, more than 90,000 small businesses across 130 cities have benefited from LendingKart. Finzy Amit More, Vishwas Dixit, Abhinandan Sangam, and Apoorv Gawde started the P2P lending platform namely Finzy in 2014 to optimize risk in investments. This platform allows investors to earn profits between 7.99% to 27.99% returns on investments, etc. Why Choose Enterslice for P2P Lending Services? Expertise in Regulatory Compliance: Our professional is rooted in a depth understanding of regulatory frameworks that govern the P2P lending landscape. We are confident and ensure that your business P2P lending will comply with all regulatory legalities and give you peace of mind. AI-Driven Efficiency: Enterslice ranked forefront in technological development, harnessing AI intelligence to offer a streamlined business process. Our efforts will tend to limit your operational costs along with improving users' (lenders & borrowers) experience on your platform. Comprehensive Business Solutions: Along with regulatory compliance, we also offer your business a wide range of services basically designed with the intent to thrive your P2P lending business growth. Our team approach assistance covers business strategy development to financial modeling to mitigate business-associated risks. Global Perspective With a global clientele and a remarkable presence in various countries, our firm provides Insights into International most effective practices including the market trend to enable you to make informed business decisions and expand your business reach. Customized Packages Our team knows the facts that each P2P lending business is unique in nature. Thus we are determined to offer you customized business solutions that comply with your specific business requirements. We have a wide range of packages suited for both new startups and established businesses.
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