The Reserve Bank of India (RBI) has released the Master Directions relating to peer-to-peer lending (P2P Lending) on 4 October 2017 (Master Directions). This was preceded by a RBI notification dated 18 September 2017 issued by the RBI stating that non-banking institutions carrying on the business of a peer to peer lending platform will be considered non-banking financial companies, thereby bringing it in the aegis of RBI. A discussion paper on P2P Lending was also issued by the RBI in April 2016 eliciting public comments.
What is P2P Lending?
P2P Lending platform (P2P Platform) is a platform engaged in the business of providing the service of loan facilitation (under a contract) through an online medium or otherwise, to the participants who have entered into an arrangement with such platform to lend on it or to avail of loan facilitation services provided by it. It is a form of crowd funding where lenders are matched with the borrowers to provide unsecured loans. Usually the platforms follow a reverse auction model in which the lenders bid for a borrower's loan proposal and the borrower has the freedom to either accept or reject the offer. The interest rate may be decided by the P2P Platform or by mutual agreement between the borrower and the lender. P2P Platforms undertake due diligence on the lenders and the borrowers, facilitate documentation of loan agreements, provide assistance in disbursement and repayment of loan amounts and render services for recovery of the loans originated on such platforms.
Overview of the Master Directions
Eligibility A P2P Platform should be a company incorporated in India with a minimum net owned fund of INR 2 crores (or such higher amount as the RBI may specify), and obtain a certificate of registration (CoR) from the RBI. Existing P2P Platforms have to make an application to the RBI to obtain the CoR (after complying with the Master Directions) latest by 4 January 2018 and can continue their existing P2P Lending unless their application is rejected by the RBI. As far as new entrants are concerned, RBI will grant an in-principal approval with a validity of 12 months to set up the P2P Lending business, after which, RBI would grant a CoR on being satisfied with the new entrant's readiness and compliance of other conditions.
Restrictions A P2P Platform cannot (i) raise deposits; (ii) lend on its own; (iii) provide / arrange any credit enhancement / guarantee; (iv) facilitate / permit any secured lending linked to its platform; (v) hold funds received from lenders (or borrowers, on repayment) or through escrow, on its own balance sheet; (vi) cross sell any product except for loan insurance products; and (v) have a leverage ratio of more than 2. Notably, a P2P Platform cannot permit any international flow of funds or store / process data relating to its activities and participants on hardware located outside India.
Prudential norms The aggregate exposure of a lender to all borrowers across all P2P Platforms is capped at INR 10 lakh and the aggregate loans taken by a borrower across all P2P Platforms is also capped at INR 10 lakh. The exposure of a single lender to the same borrower across all P2P Platforms is capped at INR 50,000. The maturity period of the loans is capped at 36 months.
Fund transfer mechanism The fund transfer on a P2P Platform is required to be effected through banking channels (cash is strictly prohibited) and using the modus of at least 2 escrow accounts, one for funds received from the lenders and pending disbursal, and the other for collections from the borrowers. The escrow accounts have to be operated by trustee(s) who are mandatorily required to be promoted by the bank maintaining the escrow accounts.
RBI approval The requirement of prior RBI approval in case of change of control / management of the P2P Platform is on the same lines as that applicable to the non-banking financial companies and will be required for (i) allotment of shares which result in the aggregate holding of an individual or group to 26% or more of the paid-up capital of the P2P Platform; (ii) takeover or acquisition of control of the P2P Platform (resulting in management change or not); (iii) change in shareholding, including progressive increases, resulting in acquisition or transfer of 26% or more of the paid-up equity capital of the P2P Platform; (iv) change in management of the P2P Platform resulting in change of more than 30% of the directors (excluding independent directors); and (v) change in shareholding that would enable an acquirer to nominate a director on the board of the P2P Platform. A 30 days' public notice is also required to be given after obtaining the approval from the RBI and before effecting such change of control / management.
Other requirements A P2P Platform is required to maintain credit information data and submit it to credit information companies. It is also required to make certain disclosures to the lenders and borrowers and comply with reporting requirements (which include quarterly statements containing details about amount of loans disbursed and the funds held in the escrow accounts). The Master Directions also lay down the details of 'fit and proper criteria' vis-à-vis the directors of the P2P Platform, a 'fair practices code' and a grievance redressal policy to be adopted by the P2P Platform. The Master Directions also require adequate safeguards for data security, information technology system and a business continuity plan to ensure servicing of loans for full tenure even in case of closure of the P2P Platform.
The Master Directions appear to be slightly cautious (specifically the low borrowing and lending limits of INR 10 lakh) and may deter potential participants from accessing P2P Platforms. However, RBI seems to have adopted the "better safe than sorry" approach considering how nascent P2P Lending is in India, a USD 8.6 billion (approximately) scam by a Chinese P2P Platform-Ezubao in the form of a 'Ponzi Scheme' and prohibitions on P2P Lending in certain jurisdictions including Israel and Japan. While an alternative approach may have been to restrict interest rates, RBI's perspective on P2P Lending appears to further the concept of crowd sourcing rather than creating an alternative to availing bank loans. Further, prohibitions on cash transactions and international flow of funds are expected to keep a check on money-laundering and compliance issues from a foreign exchange law perspective. Overall, the Master Directions are a positive step to regulate the fast-growing sector, however given that many new entrants into the P2P Lending business may be start-ups, it remains to be seen how many of these start-ups can meet the INR 2 crores minimum net owned fund requirement and provide effective debt recovery services.
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