India: Peer To Peer Lending And Its Regulation In India

The advent of technology has led to various changes in the traditional ways of conducting business operations. One such change has been the emergence of Peer to Peer (hereinafter "P2P") lending platforms for raising loans by businesses and individuals. The P2P lending platforms provide an alternative to traditional banks and societies for obtaining finances.  

P2P lending is essentially a way in which businesses and individuals acquire required funds from online platforms. The route enables fundraising directly without the presence of financial institutions as intermediaries. The P2P lending platforms act as marketplaces or aggregators bringing together lenders/ investors and borrowers on online channels. Under the arrangement, the lenders are benefited by availing loans with shorter repayment terms and need for security. It has become a widely acceptable and preferred way of raising finances due to the lower interest rates, easier approval, and minimal documentation involved.

Legal framework for P2P lending platforms

The regulation of P2P lending platforms is governed by the Reserve Bank of India (hereinafter "RBI") vide the Master Directions - Non-Banking Financial Company - Peer to Peer Lending Platform (Reserve Bank) Directions, 2017¹. The Master Directions under Section 4 (1) (v) define P2P lending Platform in the following manner:

"Peer to Peer Lending Platform" means an intermediary providing the services of loan facilitation via online medium or otherwise, to the participants as defined at item (iv) of sub-paragraph (1) of paragraph 4 of these directions;"²

The Master Directions provides that apart from a company, no non-banking institution can undertake the business of P2P lending platform³. Further, any NBFC intending to carry out the business of P2P (hereinafter "NBFC-P2P) lending is to do the same by obtaining a Certificate of Registration (hereinafter "CoR") from the RBI.⁴ The Master Directions also provide for the conditions for obtaining a CoR, eligibility for registration of an NBFC-P2P, the necessary financial capital structure, the scope and extent of activities, operational guidelines etc. Additionally, the Master Directions are accompanied by Annexures which have other elaborate detailing of the technical aspects of the above-mentioned rules.  

In addition to these Directions, the RBI regularly updates the framework by the way of the circulars that are released for the purpose of monitoring and regulating the activities of the P2P lending Platforms. For instance vide a recent update to the Master Directions was brought vide an amendment in December 2019.⁵

Compliance requirements before raising P2P loans

NBFC-P2P

The Master Directions expressly provide the obligations of the NBFC-P2P towards the lenders and borrowers. The Directions state that the NBFC-P2P is to undertake due diligence on the borrowers and lenders⁶. The NBFC-P2P is further obligated to undertake credit assessment and risk profiling of the borrowers and disclose the same to their prospective lenders.⁷ They must require the prior and explicit consent of the borrowers and lenders to access their credit information.

The Master Directions under its scope of activities provides that it is the responsibility of the NBFC-P2P to undertake documentation of loan agreements and other related documents, provide assistance in disbursement and repayments of loan amount and render services for recovery of loans originated on the platform. The Master Direction specifically mandates the maintenance of a minimum Leverage Ratio⁸ of 2⁹. The NBFC-P2P are restricted from accepting deposits, lending its fund, providing any credit guarantee¹⁰, allowing the international flow of funds,¹¹ and trading of any products except loan specific insurance products¹²and trading in securities.

The NBFC-P2P is expected to follow the Fair Practices Code, as prescribed by RBI from time to time, to maintain utmost confidentiality with respect to the transactions as undertaken through the platform and maintain a grievance redressal mechanism at all times for the internal as well as outsourced activities.

Borrowers

The Master Directions do not contain any specific requirements as to compliances to be observed by the borrowers. However, there are certain practical considerations to be kept in mind of the borrowers before availing a loan through P2P lending Platforms. It is recommended that the genuineness of the P2P Platform should be adequately checked. The borrowers as per the prudential norms are required not to taken aggregate loans exceeding Rs. 10,00,00/- (Rupees Ten Lakhs) across all P2P lending Platforms at any point in time.¹³ The prudential norms also state that the maturity of the loans shall not exceed thirty six (36) months.¹⁴

Additionally, it is also recommended that the borrower should furnish all the required details by the platform, and ensure the complete truth in every piece of furnished information to the P2P lending Platforms. It is also recommended that due diligence is conducted on their part before investing and at the time of repayment.

Lenders

The Master Directions state that an aggregate exposure of a lender to all borrowers at any point of time, across all P2P platforms, shall be subject to a cap of Rs. 50,00,000/- (Rupees Fifty Lakhs) provided that such investments of the lenders on P2P platforms are consistent with their net-worth.¹⁵ The Directions further state that a lender investing more than Rs. 10,00,000/- (Rupees Ten Lakhs) is required to produce a certificate to P2P platforms from a practicing Chartered Accountant certifying a minimum net-worth of Rs. 50,00,000 (Rupees Fifty Lakhs).

Other guidelines/ regulations with respect to P2P lending Platforms

Apart from the above mentioned considerations to be ensured for transacting through P2P lending Platforms are the following:

1. Fund Transfer Mechanism: All the fund transfer between participants is to take place through escrow accounts operated by a bank promoted trustee.
2. Interest Rate: The interest rate should be in annualized percentage rate format.

Conclusion

The fintech space is an ever-expanding and in the wake of the covid-19 pandemic the movement to the digital space from the traditional ways of lending and borrowing is inevitable. The preference of P2P lending platforms due to the easy availability of loans and negligible requirements as to collaterals have increased the market players in the field and borrowers in these platforms. However, the activities in the platforms have to be carried out in a way to be complaint with the all the guidelines including the ones mentioned in the proceeding paragraphs provided in the Master Directions. The P2P platforms with its growth bring along with them various governing issues and increase a need to regulate such platforms with more laws and rules.

Footnotes

1 Master Directions - Non-Banking Financial Company - Peer to Peer Lending Platform (Reserve Bank) Directions, 2017, RBI/DNBR/2017-18/57, October 4, 2017. Updated on December 23, 2019

2 Section 4 (1) (iv) "Participant" means a person who has entered into an arrangement with an NBFC-P2P to lend on it or to avail of loan facilitation services provided by it.

3 Section 5 (1) (i) of the Master Directions - Non-Banking Financial Company - Peer to Peer Lending Platform (Reserve Bank) Directions, 2017.

4 Section 5 (1) (ii) of the Master Directions - Non-Banking Financial Company - Peer to Peer Lending Platform (Reserve Bank) Directions, 2017.

5 RBI Circular, DOR.NBFC(PD) CC.No.106/03.10.124/2019-20, dated December 23, 2019, retrieved from: https://m.rbi.org.in/Scripts/BS_CircularIndexDisplay.aspx?Id=11764

6 Section 6 (2) of the Master Directions - Non-Banking Financial Company - Peer to Peer Lending Platform (Reserve Bank) Directions, 2017.

7 Section 6 (2) (ii) of the Master Directions - Non-Banking Financial Company - Peer to Peer Lending Platform (Reserve Bank) Directions, 2017.

8 Section (4)(ii) as "Leverage Ratio" means the Total Outside Liabilities divided by Owned Funds, of the NBFC-P2P"

9 Section 7 (1) of the Master Directions - Non-Banking Financial Company - Peer to Peer Lending Platform (Reserve Bank) Directions, 2017.

10 Section 6 (1) (iv) of the Master Directions - Non-Banking Financial Company - Peer to Peer Lending Platform (Reserve Bank) Directions, 2017.

11 Section 6 (1) (viii) of the Master Directions - Non-Banking Financial Company - Peer to Peer Lending Platform (Reserve Bank) Directions, 2017.

12 Section 6 (1) (vii) of the Master Directions - Non-Banking Financial Company - Peer to Peer Lending Platform (Reserve Bank) Directions, 2017.

13 Section 7 (3) of the Master Directions - Non-Banking Financial Company - Peer to Peer Lending Platform (Reserve Bank) Directions, 2017.

14 Section 7 (5) of the Master Directions - Non-Banking Financial Company - Peer to Peer Lending Platform (Reserve Bank) Directions, 2017.

15 Section 7 (2) of the Master Directions - Non-Banking Financial Company - Peer to Peer Lending Platform (Reserve Bank) Directions, 2017.

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