Peer to Peer Lending Regulations
Peer to Peer Lending Regulations
Peer to Peer (P2P) lending is a platform for individuals to seek financial support directly from the lenders. It is also known as crowdlending or social lending. P2P lending is regulated by the Reserve Bank of India (RBI). To implement the rules and regulation of P2P, the RBI introduced Non-Banking Financial Company-Peer to Peer Lending Platform (Reserve Bank) Directions (NBFC-P2P). On 23rd December 2019, the RBI released a notification stating that the lending capacity in the P2P platform has been increased up to Rs.50 lakh for the borrowers at any given point of time. They have also notified that lenders lending more than Rs.10 lakh should provide a certificate.
NBFC-P2P Directions (as per 23rd December 2019)
The NBFC-P2P Directions was implemented through the Notification No. DNBR.045/CGM (CDS)-2017. It is exercised through Section 451 of Reserve Bank of India Act 1934.
MBFC-P2P Scope of Activities
The following are the scope of activities of NBFC-P2P:
- It can act as an intermediary in Peer to Peer lending platform. It can also provide support to online marketplace or platform to the participants involved in P2P.
- As per Section 45I(bb) of the Companies Act 2013, it shall not raise deposits.
- It should not lend to itself
- The P2P should not provide or arrange credit enhancement or credit guarantee for any company, even if it is registered with Companies Act.
- The funds received for lending, funds provided for lending and servicing loans should be documented in the balance sheet.
- P2P shall not upsell the product except for specific loan insurance products.
- Shall not permit international funds.
- Legal support should be provided for all required and applicable participants.
- All data relevant to activities and participants should be stored on hardware and located within India.
- Provide risk profiling and credit assessment of the borrowers. The information should be disclosed to the lenders.
- The P2P lending companies should acquire prior consent from the participants to access credit information.
- The documentation process of the loan agreements and other related documents should be managed by the P2P lending companies.
- The participants should be assisted with repayments and disbursement of the loan amount. It shall also provide services for retrieving the loans.
Note: NBFC-P2P should not perform any activity other than those mentioned in paragraph 6(1) and 6(2) of the Directions. Providing any deployment of investible funds (not for trading) in instruments as specified by the Bank, will be permitted.
The following are the norms to should be followed by all the NBFC-P2P lending companies:
- The leverage ratio of the NBFC-P2P should be maintained not exceeding 2.
- The lender shall provide financial assistance of not more than Rs.50 lakh to borrowers across all P2P platforms. However, the lending scale shall remain the same only if the investments of the lenders on P2P platforms are consistent with their net-worth.
- Any lender investing more than Rs.10 lakh in the P2P platform should produce a certificate to P2P lending platform. The certificate should be certified by a CA stating that the certifying amount is less than Rs.50 lakh.
- Loans borrowed at any point of time from the P2P should be maximum of Rs.10 lakh.
- A lender cannot provide financial assistance in the P2P platform of more than Rs.50,000 to the same borrower.
- The repayment of the loans should not exceed more than 36 months.
- All P2P lending companies should acquire a certificate from the lender or borrower.
Transfer of Funds
- Funds transferring from lender to borrower on the P2P platform should be made through the Escrow account only.
- The account should be operated by a trustee promoted by the concerned bank
- The participants shall maintain two types of accounts:
- To receive funds from the lenders and pending disbursal
- To collect from the borrowers
- Any transaction in the P2P platform should be made through the registered bank. Transaction through cash is not entertained.
For more details on the funding mechanism, check Annex-I in the below given NBFC-P2P pdf.
For Existing NBFC-P2P Companies
Companies that exist as NBFC-P2P shall apply within three months before the expiry date of the CoR.
The following are the conditions required for certification:
- If the company have not operated as an NBFC-P2P Company
- Does not follow the directions of the CoR
- Not eligible to acquire CoR
- Does not maintain the accounts or did not disclose the financial position to the bank
- Does not fulfil the criteria as stipulated in paragraphs 5(2)(1) and 5(2)(v)
Eligibility Criteria to Operate as NBFC-P2P
- The company must be an NBFC-P2P.
- The company should be incorporated in India.
- The company should acquire the Certificate of Registration (CoR) from the registered bank.
- The reserved funds should not be less than 20 million or as stipulated by the bank.
- Declaration from the directors of the company as per the required format of Annex III
- Documents as required in Annexes II to IV
- If the company is supported by the Ombudsman Scheme for Non-Banking Financial Companies 2018, it should appoint a Nodal officer as stipulated by Annex VII.
- Companies proposed to start an NBFC-P2P should apply through the application form to the Department of Non-Banking regulation in Mumbai. The forms can be obtained from the registered banks. The following are the conditions the bank seeks to consider the application:
- The entity should have all necessary managerial, technological and entrepreneurial resources to provide service to the registered participants.
- The entity should have stable financial support to undertake the P2P lending platforms
- The company should not be prejudicial to the public interest
- The company should provide a plan for the operation and secure Information Technology System
- Upon approval, the bank shall intimate the applicant. The bank shall provide a time duration of 12 months to initiate the company.
- During the allotted time from the bank, the company shall apply for all the legal documents, obtain permissions from all the required departments, report the state of compliance and then seek for in-principle approval from the bank.
- The bank, after approval, shall provide the CoR to the company.
Scroll down for more information on Annexes and NBFC-P2P DirectionsPeer-to-Peer-Directions
For guidelines to start an NBFC company, click here.