In 2017, the Indian Government announced that all new and existing peer-to-peer lending (P2P) platforms would be regulated and governed by the Reserve Bank of India (RBI) and treated as non-banking financial companies (NBFCs).
What is P2P lending?
Peer-to-peer lending (or “P2P”) is a new method of debt-financing that is regulated by Reserve Bank of India (RBI), which connects people who need money (borrowers) directly with people who have money to invest (lenders) across an online platform. This process is designed to be the most efficient form of lending by cutting out the middlemen, namely the banks, in the process by lowering the overall operating costs as compared to traditional financial institutions or banks. As a result, borrowers can get access to credit at low interest rates and lenders earn high returns.
Regulation in India
On 4th October 2017, The RBI had finally released the guidelines for peer-to-peer (P2P) lending platforms, henceforth, known as non-banking financial companies (NBFCs-P2P). The norms require all P2P companies to apply for registration as NBFCs, effective immediately, to start or continue doing their businesses.
Until April 2016, there were more than 15 start-up P2P lending platforms in India. Although in early stages in India and of not much in value yet, the potential benefits that P2P lending promises to various parties (to the borrowers, lenders, agencies etc.) and its associated risks to the financial system are too important to be ignored, according to RBI.
For India’s P2P lending market, which is predicted to be worth $4-5 billion by 2023, `the rollout of these guidelines gives more legitimacy to the business. The general response to the guidelines has been positive. They are expected to help the sector realize its potential and pave the way for P2P platforms to gain credibility, transparency, and legality. This will help in its goal of financial inclusion as well as in establishing P2P lending as an alternative investment opportunity and an asset class.
Here are some prominent features of the guidelines released by RBI:
All existing and prospective P2P Lending companies (NBFC-P2Ps) will be required to submit an application for registration with the Department of Non-Banking Regulation, Mumbai. However, existing NBFC-P2P have been given 3 months to apply for registration, till then they can continue their operations, as usual. Also, RBI will help in facilitating a smooth transition for existing P2P lending platforms within the timelines set by it.
This requirement brings a governing eye over such companies without hurting the ‘decentralized’ aspect of them lending money. This helps a lot when it comes to eliminating frauds and catching those defaulting loans.
RBI has mandated the capital requirement for the existing as well as the aspiring NBFC-P2P. “Every company seeking registration with the Bank as an NBFC-P2P shall have a net owned fund of not less than rupees twenty million or such higher amount as the Bank may specify”. Basically, should an organization want to become a P2P Lending NBFC, it must have a Net Owned Fund (NOF) of ₹2 Crore or above.
The RBI is here focusing on the sustainability of P2P Lending NBFCs to have a good financial standing. Firstly, any new set up requires investments in the platform, technology as well as marketing and needs funds to manage day to day expenditure. A company would need a backup to manage unforeseen losses and expenditures and having NOF requirement would reduce this risk. Secondly, this ensures that a company can handle setbacks in the form of losses, more specifically defaults and unpaid loans, at any stage of its operation.
Hence, it gives a financial stand as well as provides a backup to P2P Lending NBFCs.
Leverage Ratio of 2:1
RBI has asked NBFC-P2P to maintain a Leverage Ratio not exceeding 2. The leverage ratio is actually the ratio of debt against owned capital and not the lending on the platform. This guideline is expected to bring higher financial stability to platforms.
P2P lending platforms are to create and manage two separate escrow accounts —one for the disbursal of funds by lenders, and the other for the money repayments from borrowers. Both these escrow accounts need to be overseen by bank promoted trustee.
A major advantage of P2P lending is access to speedy loans. Creating two separate accounts would help in faster and transparent transactions as well as smooth functioning. Money from lenders will come into one account for disbursal and money will be collected from borrowers in repayment account. Additionally, since these are escrow accounts, managed by a trustee, there’s no chance of syphoning of money by platforms for their own use.
The Cap on lending and borrowing amount
The RBI, in the guidelines, has sought to reduce the risk to the retail investor:
– The aggregate exposure of a lender to all borrowers at any point of time, across all NBFC-P2Ps, shall be subject to a cap of Rs 10 Lac.
– The guideline, however, is silent on institutional lenders.
– Also, exposure of a single lender to a borrower across NBFC-P2P has been capped to Rs 50,000.
The capping amount is beneficial for retail lenders as it would reduce the risk. However, it would be a pain point for HNIs and UHNIs who understand their risk and are interested in taking a bigger exposure.
The aggregate loans taken by a borrower at any point of time, across all P2Ps, has also been capped at the same amount. This is a significant step in the guidelines to discourage rampant borrowing across NBFC-P2P.
The aggregate loans taken by a borrower at any point of time, across all NBFC-P2Ps, shall be subject to a cap of Rs 10 Lac.
Also, a borrower can borrow from a particular lender an aggregated amount of ₹50,000 at a particular point of time.
Nature of Loans
The guidelines have only allowed NBFC-P2P to originate unsecured loans linked to its platform and the maturity of the loans must not exceed 3 months.
Focus on Transparency:
The guidelines have emphasized transparency during the activity of lending and borrowing. NBFC-P2P are required to disclose the personal identity, required loan amount, interest rate and credit score, T&C of loan, likely returns, fees and taxes.
“An NBFC-P2P shall be required to disclose the following: (i) to the lender
details about the borrower/s including personal identity, required amount, interest rate sought and credit score as arrived by the NBFC-P2P.
details about all the terms and conditions of the loan, including likely return, fees and taxes;”
The emphasis is also on privacy as only a few details are asked to be shared between the lenders and borrowers.
Capital and Return Guarantee:
RBI has mandated to receive explicit affirmation from participating investors about the risks involved in the transaction. NBFC-P2P shall not guarantee any return and entire principal may be lost in case of a default by a borrower. NBFC-P2P also cannot guarantee the recovery of loans.
Submission of data to Credit Information Companies (CICs)
Henceforth, an NBFC-P2P shall become a member of all CICs and submit data (including historical data) to them. This should help reduce default rates and bring more credibility to the system.
NBFC-P2P shall: (i) keep the credit information (relating to borrower transactions on the platform) maintained by it, updated regularly on a monthly basis or at such shorter intervals as may be mutually agreed upon between the NBFC-P2P and the CICs”
The NFBC-P2P must store and process all data relating to its activities and participants only on hardware located within India
The role of the RupeeCircle would be limited to bringing the borrower and lender together without the lending and borrowing getting reflected on its balance sheet.
In order to assist monitoring, RupeeCircle will submit regular reports on their financial position, loans arranged each quarter, complaints etc. to the Reserve Bank.
The guidelines in this regard will include fit and proper criteria for Promoters, Directors, CEOs. A reasonable proportion of board members having financial sector background could be suggested. The management and operational personnel of the platform would need to be stationed within the country.
Confidentiality of the customer data and data security would be the responsibility of the Platform. Transparency in operations, adequate measures for data confidentiality and minimum disclosures to borrowers and lenders would also be mandated through a fair practices code.
Even though the Reserve Bank of India has regulated the industry, it hasn’t deprived it of its decentralized nature. This is ideal for an industry in its early stages. Platforms like RupeeCircle are already compliant with most of the norms set out by the RBI and applied for CoR of P2P Lending NBFC with RBI. Now, with the highest financing authority of the country safeguarding your investments, so why not put your trust in P2P Lending Platform RupeeCircle.