NBFC – PEER TO PEER (P2P) LENDING PLATFORM
The Reserve Bank of India (RBI) by way of Notification No. DNBR. 045/CGM (CDS)- 2017 on 24thAugust, 2017 in terms of Section 45I(f)(iii) of RBI Act,1934 issued Directions (i.e., NBFC – Peer to Peer Lending Platform (Reserve Bank) Directions, 2017) for Non-Banking Financial Company that carries on the business of Peer to Peer Lending Platform.
Further, these Directions shall come into force with immediate effect and the same are described as under:
What is P2P lending?
P2P is an online lending platform, wherein companies basically provide a platform to the lenders and borrowers were they can lend and borrow money via online medium. These platforms facilitate the flow of credit across India by connecting borrowers directly with individuals holding surplus funds and is a high potential avenue of wealth creation to investors across the country. NBFC registered as P2P lending platform charges registration fees or processing fees in addition to interest payment to lender from borrower.
Lender and borrowers have to register to use the platform and wherein the companies have their own system of determining creditworthiness of borrowers. Borrowers are listed on such platforms under different risk categories with varying interest rates i.e., low-risk borrower will get loan on low interest rate comparatively than high-risk borrower.
Loan provided on such platform carries high risk as these are unsecured loan. The biggest risk for lenders is default in making repayment by borrowers. The platforms are now reducing this risk by strict filtering of borrowers at the time of registration only by taking information like banking details, income tax returns and credit rating for approved credit rating agencies. Penalty provisions are also there in case of delayed payment as well as companies also helps in recovery from borrowers.
Further lender can take legal action against borrower in case of default whose cost shall be borne by lender himself.
Eligibility for Registration of NBFC P2P
- Only NBFCs registered as a company can undertake the business of Peer to Peer Lending platform.
- For commencing this business, NBFC-P2P requires to obtain Certificate of Registration (CoR) from the bank.
- For seeking registration minimum net owned fund required is 20 Millions (i.e., Rs. 2 Crores) or above as RBI may specify.
NBFC P2P Registration Process
NBFC-P2P before commencing operations shall apply for registration to the Department of Non-Banking Regulation, Mumbai of the Bank, in the form as specified. Faircent, Lendbox, Rupaiya exchange, LenDen Club are some players who are registered and providing NBFC-P2P platform.
Further, it is to be noted that existing NBFCs cannot operate as a peer-to-peer lending platform.
While considering the application, RBI requires from the applicant to fulfil the following conditions:
- Company is incorporated in India.
- Directors and promoters of the company are fit and proper and managements’ general character is not prejudicial to the public interest.
- Company shall be required to have necessary technological, entrepreneurial and managerial resources to offer services to lenders and borrowers.
- Appropriate capital structure should be there to undertake the business of P2P Lending Platform.
- Company has submitted a plan for, or implemented, a robust and secure Information Technology System.
- Company has submitted a viable business plan for conducting the business of P2P Lending Platform.
- Any other conditions as specified by RBI.
The RBI after being satisfied that company has fulfilled with all the conditions, grant in-principle approval for setting up of P2P Lending Platform. Further the validity of such approval will be 12 months from the date of such grant. And within those 12 months, company shall put in place the technology platform, enter into all other legal documentations required and report status of compliance with terms of grant in-principle approval to RBI. Then RBI after being satisfied that the entity is ready to commence its operations, grant CoR as an NBFC-P2P.
Scope of activities
NBFC-P2P shall function in accordance with points stated below:
- NBFC-P2P shall act as an intermediary only who shall be engaged in providing online market place to lenders and borrowers involved in P2P lending arrangement.
- Shall not raise deposits (any receipt of money by way of deposit or loan in any other form) and not lend on its own.
- Shall not provide credit enhancement/ credit guarantee.
- Shall not permit any secured lending linked to its platform.
- NBFC-P2P in its balance sheet shall not hold funds received from lenders for lending or from borrowers for servicing loans.
- Not permitted to cross sell any product except for loan specific insurance products.
- International flow of funds shall not be permitted.
- Adherence to requirements as per law shall be given due importance.
- Company shall be required to store and process all data relating to its activities and participants on hardware located in India.
- NBFC-P2P is also allowed to invest its funds but trading is not allowed in instruments specified by RBI.
Activities in regards to lenders and borrowers:
- Shall conduct due diligence on the participants.
- Shall conduct credit assessment of the borrowers and disclose the same to their prospective lenders.
- For accessing credit information of participants company can take prior consent of participants of the arrangement.
- Undertake documentation of loan agreements.
- Further can provide assistance in disbursement and repayment of loan amount and can also engaged in recovery of loans provided on the platform.
- Mandatory maintenance of Leverage ratio (i.e., outside liabilities on the balance sheet of an NBFC P2P platform that it can raise divided by its owned funds) not exceeding 2.
- Aggregate exposure of a lender to all borrowers at any point of time, across all P2Ps, shall be subject to a cap of ₹ 10,00,000/-.
- Aggregate loans taken by a borrower at any point of time, across all P2Ps, shall be subject to a cap of ₹ 10,00,000/-.
- The exposure of a single lender to the same borrower, across all P2Ps, shall not exceed ₹ 50,000/-.
- Maturity of the loans shall not exceed 36 months.
- P2Ps shall obtain a certificate from the borrower or lender, as applicable, that the limits prescribed above are being complied with.
Points to emphasis regarding fund transfer
- Fund transfer between lender and borrower on this platform shall be through escrow account which shall be operated by trustee.
- Two escrow account shall be need to maintain i.e., one for receiving fund from lenders and another one for collections from borrowers.
- Trustee stated above shall mandatorily be promoted by bank maintaining the escrow accounts.
- Cash transactions are strictly prohibited and all fund transfers shall be through and from bank accounts.
NBFC P2P Reporting requirements
NBFC P2P requires to submit a quarterly statement to the regional office of RBI, a statement containing details stated below within 15 days from the end of the such quarter:
- Number and amount of loans disbursed during the quarter, closed during the quarter, outstanding at the beginning and at the end of quarter along with number of lenders and borrowers at the end of such quarter.
- Amount held in Escrow Account, wherein details should be bifurcated as amount received from lenders and amount received from borrowers.
- Number of complaints received which is to be bifurcated as received from lenders and borrowers outstanding at the beginning and end of quarter and disposed off during such quarter.
- The leverage ratio along with details of its numerator and denominator.
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