In this article, we discuss the various aspects of peer-to peer lending (“P2P Lending”) business in India and the things that should be kept in perspective before engaging in P2P Lending.
What is P2P Lending?
P2P Lending is a type of lending process which is done through a lending platform wherein the lenders and borrowers are connected through the lending platform. The lending platform acts as an intermediary whereby it connects the lenders and borrowers based on the loan amount and risk appetite of the lenders. The platform also facilitates loan disbursal, credit assessment, repayment etc.
Who can engage in P2P Lending?
Only a non-banking financial company (“NBFC”) having a certificate of registration from the Reserve Bank of India (“RBI”) can engage in P2P Lending. Such NBFCs shall have a minimum net owned fund of at least Rs. 2 Crores.
Mechanism for P2P Lending
Three parties are involved in P2P lending: borrowers, lenders, and the P2P platform. Borrowers and lenders register on the P2P platform, and the P2P platform connects the borrowers with the lenders depending on the lender's risk appetite and the borrower's loan requirements. The P2P charges a finder's fee for connecting the borrowers and lenders and facilitating the loan. P2P platforms also do credit assessments of borrowers and provide lenders with an option for a variety of borrowers to lend based on their risk appetite, borrower's credit assessment, and loan amount requirements. Lenders can give several loans to different borrowers and thus diversifying their loan portfolio and mitigating their risk.
Benefits of P2P Lending
The P2P Lending business provides borrowers to an easy access to number of lenders for unsecured loans as an alternative to traditional institutional lenders, which have been proven to be somewhat difficult to get loans owing to the several factors viz. higher interest rates, higher credit scores etc. For a country like India with large population, there are several people in requirement of a small unsecured loan amount without any hassle and P2P Lending paves the way for the same. P2P Lending also provides an investment option to lenders to lend money to several borrowers within its comfort.
Regulatory framework
The RBI has issued Master Directions – Non-Banking Financial Company – Peer to Peer Lending Platform (Reserve Bank) Directions, 2017 (“P2P Master Directions”), which governs P2P Lending in India. Since P2P platforms are NBFCs, they have to comply with other directions, circulars and legislation issued by the RBI and as applicable to them.
A few snippets of the regulatory framework as per P2P Master Directions are provided below:
- The NBFC shall not raise deposits as defined under section 45I(bb) of the RBI Act, 1934 or the Companies Act, 2013;
- The NBFC shall not lend on its own or cross sell any product except for loan specific insurance products;
- The NBFC shall not facilitate or permit any secured lending linked to its platform;
- The NBFC shall not permit international flow of funds;
- The NBFC shall not hold, on its balance sheet, funds received from lenders for lending or funds received from borrowers for servicing loans;
- Fund transfer between the participants on the P2P platform shall be through escrow account mechanisms operated by a bank promoted trustee. At least two escrow accounts, one for funds received from lenders and pending disbursal and the other for collections from borrowers, shall be maintained;
- The Company shall create appropriate policies and comply with prudential norms as specifically detailed out in the P2P Master Directions.
Key Considerations for a P2P platform
There are specific considerations which a P2P platform (company) shall keep in mind who wish to engage in P2P Lending, some of which are enumerated below:
- The company shall be incorporated in India;
- The company shall have the necessary technological, entrepreneurial and managerial resources to offer services to participants;
- The promoters and directors of the company shall be fit and proper;
- The company shall implement a robust and secure information technology system;
- The company shall submit a viable business plan for conducting the business of P2P Lending.
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.