Online lending transactions are in their nascent stage in India and given the increase in peer to peer ("P2P") lending through e-commerce marketplace it is of extreme importance to regulate e-lending transactions. Accordingly, the Reserve Bank of India ("RBI") has recently issued Master Directions – Non-Banking Financial Company – Peer to Peer Lending Platform (Reserve Bank) Directions, 2017 ("Directions") so as to regulate a company which carries on the business of P2P lending platform ("P2P Lending Platform") in India. These Directions follow consultation paper released by RBI on P2P lending and decision of RBI to regulate P2P Lending Platform as Non-Banking Financial Company. Currently, the P2P lending space is populated by more than thirty (30) players including Faircent, LendBox, LenDenClub, IndiaMoneyMart, Monexo, Rupaiya Exchange which would now be regulated by RBI.
One of the main elements of the Directions is the mechanism specified in relation to the registration of P2P Lending Platform. As per the Directions, an existing/prospective P2P Lending Platform is permitted to carry its business if the following conditions are fulfilled:
(i) it is a company;
(ii) it has a net owned fund of not less than Indian Rupees Twenty Million (INR 20,000,000) or such higher amount as RBI may specify; and
(iii) it has obtained certificate of registration from RBI.
The Directions make it mandatory for an existing P2P Lending Platform to obtain registration within three (3) months from the effective date, being October 04, 2017.
A P2P Lending Platform is permitted to undertake the following activities:
(i) provide online marketplace to the participants involved in P2P lending thereby acting as an intermediary;
(ii) conduct due diligence on the participants and credit assessment and risk profiling of the borrowers;
(iii) store and process data relating to its activities and the participants;
(iv) undertake loan documentation and ensure adherence to legal requirements applicable on the participants; and
(v) assist in disbursement and repayment of loan amounts.
While P2P Lending Platform is also permitted to provide services for recovery of loans, however, the Directions specifically state that it will not provide any assurance for the recovery of loans.
In terms of restrictions, P2P Lending Platform is barred from carrying out the following activities:
(i) raising deposits, lending on its own and permitting international flow of funds;
(ii) cross selling of product (except for loan specific insurance products) and providing / arranging any credit enhancement or credit guarantee;
(iii) facilitation of any secured lending linked to the lending platform; and
(iv) holding of funds received from lenders/borrowers on its balance sheet.
P2P Lending Platform is required to put in place a board approved policy to address grievances/complaints of participants. In case a complaint is redressed within a period of one (1) month, the participant shall have the right to appeal to the Customer Education and Protection Department of RBI.
In terms of prudential norms, a P2P Lending Platform is required to maintain leverage ratio not exceeding two (2). Leverage ratio is defined under the Directions as total outside liabilities divided by owned funds of the P2P Lending Platform. Further, the aggregate exposure of a lender to (i) all borrowers across all P2Ps Lending Platforms should not exceed Indian Rupees One Million (INR 1,000,000); and (ii) a single borrower across all P2P Lending Platforms should not exceed Indian Rupees Fifty Thousand (INR 50,000). Also, the aggregate loans which can be availed by a borrower across all P2Ps Lending Platforms have been capped to Indian Rupees One Million (INR 1,000,000). Additionally, the maturity of loans obtained through P2P Lending Platform cannot exceed thirty six (36) months. In order to monitor the above exposure limits, a P2P Lending Platform is required to obtain certificate from borrower and lender, as applicable, which states that the limits prescribed above have been adhered to by the respective participant.
The Directions clearly specify the fund transfer mechanism which needs to be adopted by a P2P Lending Platform for the purpose of running the business of P2P lending. At least two escrow accounts need to be setup and maintained wherein one account is for funds received from lenders and the other account for funds collected from the borrowers. The escrow accounts shall be operated by a trustee, which shall be promoted by the bank maintaining the escrow accounts.
Any takeover/acquisition of control of a P2P Lending Platform or any change in shareholding of a P2P Lending Platform which results in acquisition of twenty six (26) per cent or more of the paid up equity capital of the P2P Lending Platform would require prior written consent of RBI. Further, any change in management of a P2P Lending Platform which results change in more than thirty (30) per cent of the directors (excluding independent directors) or any change in shareholding that gives the acquirer a right to nominate a director shall also require prior written consent of RBI. Subsequent to the receipt of approval from RBI, P2P Lending Platform and other party(s) concerned would have to give a public notice of change in management/control at least thirty (30) days before such change is made effective.
In order to monitor the functioning and smooth running of P2P Lending Platform, RBI has stipulated certain reporting requirements in the Directions. Under the reporting requirements, a P2P Lending Platform is required to submit certain specified quarterly statements with the Regional Office of RBI within fifteen (15) days after the quarter to which such quarterly statements relate.
The Directions mainly aim at establishing a constructive set of norms that would govern the process of establishing and the functioning of P2P Lending Platform in India. Given the growing popularity of online lending transactions in the country, it was necessary to regulate P2P Lending Platform.
This update is authored by Clasis Law, Clyde & Co's associated firm in India
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.