In the last few months, the NBFC crisis has gathered much limelight. Especially, small NBFCs are struggling hard with asset-liability disparity amidst several corporate governance issues. Although the present liquidity...
Peer to Peer abbreviated as P2P is an online lending platform that enables an individual to avail loans from another individual without the need of any intermediary. P2P platform connects lenders and borrowers by forming a link between the borrowers who want unsecured personal loans and investors who seek to lend their money for earning a higher return on investment. The Reserve Bank of India regulates Peer to Peer lending platforms. On 4th October 2017, RBI laid down the Master Directions –NBFC-P2P Lending Platform (Reserve Bank) Directions, 2017, which obligates every existing P2P and prospective P2P business entities to comply with it. One such guideline is regarding the Funds Transfer Mechanism. This blog will provide complete information about the mechanism of fund transfer under NBFC-P2P.
Key Features of Peer to Peer Lending
P2P lending is a source of debt financing that allows a person to borrow or lend money without any intrusion of a bank or financial institution. Usually, the Peer to Peer lending is mainly through an online platform that matches lenders with potential borrowers. Here are the fundamental characteristics of a P2P platform:
- All the borrowing and lending transactions on P2P happens digitally or online.
- It eliminates the prerequisite to forming a relationship between the borrower and the lender prior to commencing the lending and borrowing process.
- Financial institutions and intermediaries have no role to play amidst the borrower and the lender.
- P2P facilitates borrowers and lenders to make their choice of borrowings and investments, thus gives them flexibility.
Eligibility Criteria to commence Peer to Peer Business
RBI has set a list of criteria that every company must meet for starting a P2P lending platform:
- No non-banking institution other than a company can undertake the Peer to Peer lending business.
- All companies which either carry or strives to do the P2P lending business must obtain a Certificate of Registration from the Reserve Bank of India.
- An applicant of NBFC-P2P Registration must have a minimum net owned funds of rupees twenty million, i.e., INR 2 Crores or a higher amount as prescribed by the RBI.
- As per RBI regulations, the company seeking a P2P License must be incorporated in India. It must have a potent IT system; also, the directors and promoters of such a company should fulfill the fit and proper.
Fund Transfer Mechanism for P2P Lending
RBI guidelines on lending and borrowing on the P2P platform is a progressive step to systemize the localized market of money lenders with a well-structured platform. Besides, it provides an array of benefits to borrowers like easy access to the credit facility, and the small lenders get an opportunity to lend their surplus funds in a more secure manner in order to yield a higher rate of return in contrast to bank deposits.
Further, RBI has set a fixed cap on the amount of lending/borrowing to safeguard the customers from any deceitful acts. These are the prudential norms issued by the RBI for all NBFC-P2P lenders and borrowers:
- The aggregate exposure of a P2P lender to P2P borrowers at any point of time shall be a cap of INR 10 Lakh.
- The aggregate loan taken by a P2P borrower at any point of time shall be subject to a cap of INR 10 Lakh.
- The exposure of a single lender to the same borrower, across all P2P lending platforms must not exceed INR 50,000.
- The maturity of such loans must not exceed 36 months.
Apart from the above-mentioned norms, RBI has also prescribed guidelines for Fund Transfer Mechanism to be used by the P2P borrowers and lenders.
Functions of Fund Transfer Mechanism
Mainly the dealings of fund transfer happen between three parties, trustee, lender and borrower. Here is how the mechanism of P2P fund transfer functions.
- P2P Platform- The online P2P lending platform provides a list of lenders and borrowers. It is a market place for the exchange of information and instructions between all the three parties’ trustee lenders and borrowers. The platform provides a ‘view only’ access to escrow account for reporting and monitoring purposes. The bank maintains the escrow account.
- Lender– By using the platform, the lender transfers funds to the escrow account, which is maintained with the bank and operated by the trustee. Lenders can choose to issue some instructions to the trustee through the P2P platform, else instruct to transfer the funds to a specific borrower.
- Borrower- Similarly, the borrower transfers repayment in the escrow account. He/she may also issue instructions to the trustee via the P2P platform or otherwise to transfer the funds to a specific lender.
- Trustee– Lastly, the trustee will operate the escrow account for transferring funds as per the instructions issued by the lender and borrower. The trustee must be promoted by the bank, maintaining the escrow account.
RBI guidelines for Fund Transfer Mechanism
- All the fund transfers amongst the participants on a Peer to Peer lending platform must be through an escrow account mechanisms that shall be operated by a trustee.
- At least two escrow accounts must be maintained wherein; one shall be for funds received from the lenders & pending disbursal, while the other will be for collections from borrowers.
- The trustee must mandatorily be promoted by the bank that shall be maintaining the escrow accounts.
- All fund transfers shall be done through and from bank accounts as the cash transactions are strictly prohibited under this mechanism.
The objective of the Fund Transfer Mechanism is to ensure that the lender’s money is only utilized for the disbursement to borrowers and not being used for any other purpose. RBI guidelines on fund transfer emphasizes on transparent dealings and disclosure requirements to the lenders, borrowers in the public arena. It encompasses an overview of credit score/assessment methodology, protection of data, grievance redressal mechanism, segregation by age and portfolio performance on NPAs on monthly assets.
Impact of RBI fund transfer guidelines on Peer to Peer Lending Platform
RBI aimed to develop a sustainable and robust online lending system through P2P. However, due to the stringent guidelines of RBI, the Peer to Peer players realized that the limited cap on exposure is confining the growth of the sector.
As RBI has capped the lending & borrowing exposure, it has made a drastic impact on the prospective P2P players and shrunken their participation. The total number of Peer to Peer lenders registrations is much lower than the numbers estimated to be operating in this segment before the regulations were issued.
Stringent conditions like the minimum requirement to have net owned funds of INR 2 Crore along with RBI regulations has compelled the budding entrepreneurs to take a step back.
Scope of activities of P2P Lending platforms
Following is the list of activities that peer to peer entities can undertake:
- P2P companies cannot raise deposits under Section 45I (bb) of the RBI Act and Companies Act, 2013.
- P2P platforms cannot lend funds on their own.
- They cannot arrange or provide any credit guarantee/credit enhancement.
- P2P platforms cannot hold the funds which are received from the lenders or borrowers in their own balance sheet.
- Such platforms are not allowed to sell any product/service apart from the loan specific insurance products.
- Further, Peer to Peer portals are not permitted for the international flow of funds.
- Companies must comply with all the legal provisions which are applicable under the relevant applicable laws.
- The P2P companies must accumulate and process the insurance-specific data on a hardware that is located within India.
Benefits of P2P- Fund Transfer Mechanism
There are several advantages that both borrowers and lenders can avail by using P2P lending platform.
Perks of Peer to Peer Lenders for Investors
- Higher returns (RoI)- The most considerate advantage of using P2P lending platform for investors is that they can gain higher returns. The lenders get full-fledged knowledge of borrowers, which helps them to develop various strategies for auto investment for loans and set priorities as per the requirement. They the lenders can determine the risk and gain greater interest on the offered loan.
- Diversification- P2P lending platform renders a wide variety of options to the lenders for investing their money. The platform enables the investors to invest in portions.
- Choose the borrower- Peer to Peer lenders get the option to classify the borrowers that qualiy identity verification. The borrowers get interest rates in regards to the risk associated with their credit score, terms of the loan, and other essential factors in their funding algorithm. The lenders prefer to invest in the loans of their interest.
- Direct communication- Through the P2P lending system, lenders get a chance to communicate with the borrowers directly. It helps them to finalize the deal in a more efficient way.
- Transparency- The biggest advantage of the P2P Fund Transfer Mechanism is that it fosters fair dealings. The investors get complete information regarding the borrower’s background. P2P platform consists of the financial data such as accounts filed and previous records of credit repayment etc. Lenders get a clear understanding of the purpose of the loan and how the capital raised shall be helpful for them in growing the business. Hence, lenders make a well-informed investment decision.
Benefits of P2P Lending for the Borrowers
- Convenient and quick loan processing- Digitization has made our life easy, and P2P lending is no exception. The online portal of Peer to Peer streamlines the operation for borrowers and lenders. Borrowers can easily apply for credit/loan facilities digitally through P2P lending that process quite fast as compared to the traditional lenders. P2P platforms have a waiting list of investors who are seeking to provide loans to the borrowers. When integrated with an automated lending process, the turnaround time of getting the funds from investors become as little as a few hours.
- No effect on the credit score- P2P lending act as one of the best source of getting loans for the borrowers. Borrowers get a personalized quote that does not have any effect on their credit score. Thus, the borrowers leverage the opportunity to reckon the rate on the loan that shall be offered to them.
- More accessible funding- Unlike conventional loans acquired from the banks or financial institutions, Peer to Peer lending is perceived as a more accessible funding source for the borrowers. Since P2P portal offers low credit ratings to the borrowers, they can access long-term and short-loans very easily.
- Feasible and fixed rate of Interest- Another benefit of P2P lending for borrowers is lower interest rates than credit cards or banks. In some cases, a reduction of around 35% is facilitated. Moreover, the interest rate is fixed, so even if a borrower delays in repaying the loan, he/she won’t have to pay any penalty.
- Charges are low- When compared to the other financial modes, P2P imposes fewer charges on loan taken; further, there is no penalty for pre-payment.
In a nutshell, one can determine that the Funds Transfer Mechanism on Peer to Peer lending is a game-changer for the financial sector. It will not only provide swift credit facilities but also ensure to keep the security intact. No P2P platform can conduct any illegal practices under the surveillance of RBI.
If you also want to start a peer to peer lending business in India, then the first step is to obtain an NBFC-P2P license from RBI. The process of registration might be a tedious job for all the newbie’s, so take the assistance of Swarit Advisors to help you establish your Peer to Peer Platform.
Also, Read: Peer to Peer (P2P) lending.