In August 2024, the Reserve Bank of India ("RBI") revised the guidelines for Peer to Peer ("P2P") lending platforms to enhance transparency for borrowers and lenders and streamline the activities these platforms undertake.
A P2P lending platform acts as an intermediary that provides services relating to facilitation of loans between borrowers and lenders through online mediums and other channels.
The P2P lending businesses have been operating in India for over a decade. However, the RBI issued the Master Direction - Non-Banking Financial Company – Peer to Peer Lending Platform (Reserve Bank) Directions, 2017 ("Directions") to regulate such activities only in 2017. In India, only non-banking finance companies registered with the RBI can undertake P2P lending, subject to complying with the Directions.
Over the years, RBI has scrutinized the business models of these platforms. News reports have frequently indicated that P2P lending platforms engage in activities contrary to the spirit of the Directions, such as promoting P2P lending as an investment product with assured returns. In response to these concerns, the RBI amended the Directions to provide clarity to P2P lending platforms regarding the activities that are permitted, ensuring proper implementation of the regulations and protecting participants on these platforms.
Amendments to the Directions
The RBI introduced several key amendments to the Directions, outlined below:
- Under the Directions, P2P lending platforms were not permitted to offer or facilitate any form of credit enhancement or credit guarantee. The amended Directions now further stipulate that P2P platforms must not assume any credit risk, directly or indirectly, from transactions on their platforms. As a result, lenders must entirely bear any loss of principal, interest, or both related to funds lent through the platform. P2P lending platforms must disclose this information to lenders as part of their fair practices code.
Additionally, while the Directions allowed P2P lending platforms to cross-sell loan-specific insurance products, the amended Directions prohibit them from offering any insurance products that act as credit enhancement or guarantees.
The amended Directions also prohibit P2P lending platforms from promoting P2P lending as an investment product with features like tenure-linked assured returns or liquidity options.
- To safeguard lenders' interests, the amended Directions prohibit P2P lending platforms from using a lender's funds in ways other than those specified in the amended Directions. They also restrict platforms from using one lender's funds to replace another's.
- In the amended Directions, the operational guidelines have been revised to promote a more transparent process for matching lenders with borrowers. Going forward, P2P lending platforms must match lenders and borrowers according to the policy approved by the board of directors of the P2P platform company before disbursing loans.
- The amended Directions also prohibit P2P lending platforms from matching or mapping participants within a closed user group, whether through an outsourced agency or otherwise. A 'closed user group' includes borrowers and lenders sourced through an affiliate or service provider to the platform.
- The amended Directions require the pricing policy to be objective and mandate that P2P lending platforms disclose fees upfront. The amendments specify that fees should be a fixed amount or a percentage of the principal amount, independent of the borrower's loan repayment.
- To enhance transparency and strengthen the P2P lending business, the amended Directions mandate that platforms disclose information about all losses incurred by lenders on principal, interest, or both. Additionally, the platforms must report the portfolio's performance, including the share of non-performing assets segregated by age, monthly on their websites.
- The amended Directions require P2P lending platforms to prominently display their registered name (as stated in the Certificate of Registration issued by RBI) along with any brand name at all customer touchpoints, including promotional material and communication with stakeholders. Platforms must also clearly state on their website, mobile/web applications, and promotional materials that it is an NBFC-P2P lending platform registered with the RBI, however, RBI does not accept any responsibility for the correctness of any of the statements or representations made or opinions expressed by the NBFC-P2P and does not provide any assurance for repayment of the loans lent on it.
- The amended Directions prohibit P2P lending platforms from outsourcing the pricing of services or fees charged to participants on the platform.
- To align the Directions with the Digital Personal Data Protection Act, 2023, and other data protection laws, the amended Directions mandate P2P lending platforms to disclose relevant details about borrowers to lenders only after obtaining the borrowers' consent.
- The amended Directions prohibit all cash transactions and mandate that all transactions occur through bank accounts. The amended Directions specify that platforms should only transfer funds from lenders' bank accounts to lenders' escrow accounts and then disburse them to borrowers' bank accounts after ensuring compliance with Board-approved lender-borrower mapping policies, borrower approval by the lender, and the execution of the loan contract by all parties involved. Platforms must also not use funds from lenders' escrow accounts for loan repayments.
- Similarly, the amended Directions require borrowers to transfer repayment amounts from their bank accounts to their escrow accounts, from which funds are then transferred to the respective lenders' bank accounts. The amended Directions prohibit using funds in the borrowers' escrow accounts for loan disbursements.
- Effective from November 15, 2024, all funds transferred into lenders' and borrowers' escrow accounts must not remain there for more than 'T+1' day, where 'T' is the date of receipt.
Impact of the Amendments
The amended Directions from the RBI represent a pivotal move toward enhancing transparency and integrity in the P2P lending sector. By addressing crucial issues such as fee structures, disclosure requirements, and fund utilization, the regulator aims to align operations of the P2P lending platforms with fair lending principles.
While a number of players industry have raised concerns about the impact of these amendments on business models, particularly regarding fund restrictions and the accelerated settlement cycle, many seek clarification on how these changes affect existing portfolios and advocate for flexible implementation.
Despite these challenges, it is clear that the amendments have been introduced with the aim to protect the interests of both lenders and borrowers and contribute to the sector's long-term sustainability. As P2P lending continues to grow in India, the amended Directions provide a more robust regulatory framework that instils confidence and encourages responsible engagement among participants. The RBI's proactive approach aims to foster a more secure and thriving P2P lending ecosystem in the country.
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.
