Clients
Peer to Peer lending is a method of debt financing under which individuals can lend or borrow money without any financial institution getting involved as an intermediary. An online platform helping to raise and distribute loans which are to be paid back with interest. The platform website may set an interest rate to be charged on the loans or it may be decided mutually between these two parties themselves. While taking a loan from a bank, the rate of interest may be higher, with many formalities involved. On this platform, borrowers can borrow money easily. They operate online with low overhead expenses, acting as aggregators. This mode is proving beneficial for lenders & borrowers, as well as the start-ups.
P2P lending platforms are technology-driven companies established under the Companies Act. The companies are regulated by the Reserve Bank of India.
To set-up your company as P2P lending platform, you need to apply for a license from RBI.
The online market is growing at a rapid speed. Not only for products but also all kinds of services are being provided online. The businesses, in order to keep up with the demand, are offering loans and investments online as well. P2P Lending provides a route for a wide cadre of investors and borrowers to meet at a common platform to satisfy their financial needs.
The rise of P2P lending industry in India was especially boosted by the 2016-2017 slowdown in lending by the banks. This slowdown forced borrowers to seek other options to seek finances.
This industry is expected to grow into a $ 5 billion industry by 2023.
There are a few conditions to be met before you can apply for a license of P2P lending platform to RBI. To start with, such platforms can only run by the NBFCs or registered companies in India.
Company registered under the Companies Act, 1956 or 2013.
Have a Net Worth of Rs. 2 crore.
After your application, RBI would grant the NBFC Certificate of Registration (CoR) for P2P lending
All P2P platforms are to be registered with the RBI as an NBFC. However, an existing NBFC is not authorized to set-up as an NBFC P2P.
As mentioned above, sale, takeover or certain changes in the Board of Directors of an NBFC requires prior approval from RBI. All documents to be submitted to RBI must be filed in agreement with the Acquirer Company.
If a new company seeking CoR fulfils all the conditions mentioned above, and upon fulfilment of such other conditions as RBI may deem fit, RBI may grant in-principle approval to set up a P2P Lending Platform.
The in-principle approval holds valid for a period of 12-months from the date which it is granted.
During these 12-months, the company must set-up its technology platform, perform all required legal documentation, and report all the compliances to RBI that were to be fulfilled.
If RBI is satisfied that the company is ready for commencing the operations, it shall grant the CoR.
On P2P Lending platforms, the funds are to be transferred between the participants via escrow account mechanism, which shall be operated by a trustee.
Minimum 2-escrow accounts to be maintained – one for receiving the amount from lenders pending disbursal and the other for the amount collected from borrowers.
Transactions to be made only through bank accounts. Cash transactions are absolutely forbidden.
On P2P Lending platforms, the funds are to be transferred between the participants via escrow account mechanism, which shall be operated by a trustee.
Minimum 2-escrow accounts to be maintained – one for receiving the amount from lenders pending disbursal and the other for the amount collected from borrowers.
Transactions to be made only through bank accounts. Cash transactions are absolutely forbidden.
Peer to Peer Lending can be classified into following types:
Short-term & small personal loans are involved. Such as for car purchase, weddings, vacations, house repair, repayment of credit card dues, etc.
SME loans for small businesses are involved. Such as for working capital, expansion, asset financing, etc. A personal guarantee may be provided against the loan by the founders.
Rare in India, these are secured loans. For purposes of personal mortgages, residential renovations, buy to-lets, and developing commercial loans.
Peer to Peer Lending can be classified into following types:
The business of the P2P Lending Platform is primarily IT-driven.
Sufficient safeguards must be in place in the IT systems to ensure the security of data.
Audit of the internal information systems to be carried at least once every 2-years by CISA certified external auditors.
This Audit report to be submitted to the Department of Non-Banking Supervision (DNBS) of RBI, within 1-month of submitting the report by the external auditor.
Reasonable arrangements must be employed to ensure that the loan agreements between the parties will continue to be managed by a 3rd party, if the P2P ceases to carry on the business.
The P2P Lending platforms are covered under Section 45 I (f)(iii) of the RBI Act. The regulatory frameworks stipulates:
The P2P platforms act as an intermediary, as they bring the lender and borrower together without reflecting the lending and borrowing in its Balance Sheet. The leverage to provide assured returns shall be prohibited. The funds shall be directly transferred into the Borrower’s Escrow account from the Lender’s Escrow account to prevent any possibility of money laundering. The FEMA guidelines must also be considered for any cross-border transactions.
The general character of the management of the company, that is the promoters, directors, and CEO, must be fit and proper and not detrimental to the public interest. Having a reasonably solid financial background. And most of the management must primarily be based in the country.
Have all the essential managerial, entrepreneurial, and technological resources to offer P2P lending services to the participants.
Viable to implement an efficient Information Technology System and Website/Mobile App Work Flow, if the same has not been implemented already.
Adequate risk management system shall be in place by the platform acting as the custodian of cheques and agreements.
Since the data of the customers are used to assess their credibility, the portal has to safeguard their information in the first place. Transparency in operations and data confidentiality shall be maintained. No false promising of regarding extraordinary returns.
Regular reports must be submitted by them based on their financial position, loans arranged in each quarter, complaints received in each quarter, etc. to RBI.
Serving public interest must be the basic objective.
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