RBI Announcement regarding P2P Lending
The RBI on October 4th, 2017 released the set of official directions that will govern the peer- to- peer i.e P2P lending marketplace. These guidelines are referred to as ‘The Master Guidelines’. They shall administer the working of Non- Financial Banking Companies (NFBC) that operate Peer to Peer (P2P) Lending Platforms.
The primary aim of these directions is to regulate and streamline the P2P lending norms. Peer to Peer lending is a form of crowdfunding via an online portal. It consists of individual lenders seeking to lend to borrowers for personal or business purposes. These guidelines intend to strictly define the responsibilities and expectations for each of the stakeholders. This includes the lender, borrower and the transaction platform (NFBC-P2Ps). The guidelines, as stated, shall come into immediate effect and demand compliance by every NFBC.
In addition to laying down the set of norms that will govern P2P lending, these guidelines seek to provide concrete definitions. For instance, RBI has explicitly stated the meaning of a P2P lending platform as an intermediary company that facilitates the provision of loans. They are an extension of the consultation paper on peer- to- peer lending from last year. The master guidelines have brought P2P lending under RBI regulation to mitigate the financial risks associated with the former.
Eligibility and Registration of NFBCs
Any NFBC that seeks recognition as a legitimate P2P lending platform requires undergoing a registration process. The eligibility criteria for registration requires a company to be incorporated in India. It should obtain a Certificate of Registration from the Bank. It is important for the company to have sufficient financial and technological as well as entrepreneurial and managerial capital to facilitate P2P lending. In addition, the company also needs to submit a business plan to highlight its course of action as a P2P lending platform.
Every perspective, as well as existing NFBC- P2P, will be required to make an application to the Department of Non- Banking Regulation, Bank of Mumbai. After diligent scrutiny, the Bank may issue an in-principle approval for the setting up and operation of the P2P lending platform. The approval will have a validity of 12 months from the date of issues.
The prospective company should set up the technology platform within this time frame. It should also present a report of compliance as required by the directions. Once the Bank is satisfied with the compliance levels, it may issue the Certificate of Registration (CoR). The CoR marks the commencement of operation for the NFBC-P2P. The existing companies should submit the application within 3 months when the directions come into action. Such companies can function and carry out their operation unless their application for a CoR undergoes rejection.
Scope of Activities
The NFBC- P2P can undertake a number of activities as mentioned in the Master Guidelines. It can act as an intermediary to facilitate P2P lending by offering an online marketplace. The NFBC- P2P needs to ensure adherence to all legal requirements applicable to all participants. The RBI requires the companies to maintain records of all transactions and activities as well as participant data on hardware. The guidelines strictly prohibit the companies from lending on its own or raising deposits. The company, under the master directions, shall not provide credit enhancement or hold any funds received from the lender or the borrower. Additionally, any international flow of funds is forbidden and only clean loans are permitted.
A due diligence of the participants with a special emphasis on credit assessment and risk profiling forms an important area of activity. Additionally, the company must undertake prior consent for credit assessment and maintain proper documentation of loan agreements. Finally, NFBC- P2P must provide assistance in loan disbursement and recovery of loans that have their origins on the said platform. Any activities beyond these, are out of scope for NFBC and shall not be undertaken by them.
Prudential Norms for P2P Lending
Prudential Norms refer to the adherence to a specific economic standard and transactionary rules for all the participants in P2P lending. These norms ensure that the lending platform has adequate capital to facilitate funds transfer. Additionally, ceilings on the amount of lending and borrowing regulate the transfer mechanism. To begin with, NFBC- P2P platforms must maintain a leverage ratio of 2. Stating the capital requirement to $307K (Rs. 2 Cr.), the RBI seeks to ensure the economic viability of P2P Platforms.
Coming to the transaction parties, the guidelines state that the aggregate lending from a particular lender to all borrowers cannot exceed Rs. 10 Lakh, at one point of time. Additionally, the amount lent to a single borrower cannot exceed Rs. 50,000. On the borrower side, a person cannot borrow more than an aggregate of Rs. 10 Lakh from all lenders, at one point of time. The maturity of loans should be achieved within a tenure of 36 months. Finally, it is the responsibility of the NFBC- P2P to obtain a certificate stating the adherence of the norms, from either party.
The prudential norms are instrumental in ensuring that only clean loans pass through. They seek to prevent the use of P2P lending platforms as a front for money laundering.
Funds Transfer Mechanism for NFBC- P2P
The threat of Money Laundering accompanies the lending of loans for P2P investment. Accordingly, a strict transfer mechanism to guide lending has been put in place. Firstly, funds transfer can take place only through escrow accounts, prohibiting cash transactions and transfers. Transactions take place strictly through bank- to- bank transfers. The use of banking channels for transfer is an attempt to streamline the presently unregulated market of money lenders and borrowers. Additionally, lending through NFBC- P2P is likely to be highly risk with minimal risk of repayment failures.
Secondly, the guidelines require the maintenance of at least 2 escrow accounts by the lending platforms. One account should cater to the amounts received from lenders and pending disbursals. While the other should manage the collections from borrowers. The transfers through bank accounts are likely to enhance the transparency of monetary exchange, thereby, curbing corruption.
Future of P2P Lending
P2P lending stands as a strong alternative to the traditional banking system. Subject to less stringent norms and regulations, peer to peer loans are becoming increasingly popular. P2P investment is likely to become an important means of money lending among local men with surplus capital. Local money lending, until now, has been accompanied by risks and challenges of heavy losses. The introduction of P2P lending has been successful in ensuring credit assessment and background verification.
Therefore, it is safe to say that P2P lending holds in store a wide range of advantages for the growing FinTech Sector. Guidelines, as issued by RBI, are essential to unveil the latent potential of P2P lending as a means of investment and business.
The Final Verdict
The Master Guidelines have become the first step in regulating the P2P Marketplace. Their successful implementation is likely to have a positive impact on the local lenders and borrowers. The well- defined norms and measures ensure that the entire process of lending is transparent. Furthermore, the necessity of bank accounts adds to greater accountability and reliability of lenders and borrowers. The guidelines have been more attractive to the low capital lenders and borrowers than high net- worth individuals, thereby, facilitating greater participation of the Indian middle class. To sum it up, RBI directions are likely to revolutionize the FinTech sector as we know it.