An Overview of Peer to Peer Lending License
Peer to Peer Lending or P2P Lending, is an online platform that enables an individual to avail of loans from another individual. Peer to Peer Lending platform directly connects Borrowers and Lenders, and it forms a link between the borrowers who seek unsecured personal loans & investors who desire to lend their money to earn a higher Return on Investment. To commence a Peer to Peer Lending Business in India, one needs to obtain a Peer to Peer Lending License from the RBI. Peer to Peer Lending License is the Certificate of Registration given to NBFCs (Non-Banking Financial Companies) to start a P2P Lending Business. In India
Peer to Peer Lending is a procedure of lending an amount of money to people or business houses via online services that help match the lenders with the borrowers. P2P Lending is mostly done online. Peer to Peer Lending is a way of debt financing which allows individuals to lend and borrow money without the participation of a financial institution as an intermediary. P2P Lending eliminates the intermediary from the process. Hence, both the Borrower and the Lender save on the charges that are charged by the intermediary. Reserve Bank of India regulates the Peer to Peer Lending in India.
Peer to Peer Lending is becoming increasingly popular as both the Lender as well as the Borrower gets an option to choose from an array of options pertaining to rate of interest and loan amount, respectively. Both are free to choose the party where they benefit the most.
Key Characteristics of Peer to Peer Lending Portals
- These are the online portals that match the borrowers with the lenders.
- There is no requirement for a prior relationship between the Borrower and the Lender.
- There is no involvement of a financial institution acting as an intermediary between the Borrower and the Lender.
- The Lender and the borrowers are free to make their choice of investment and borrowing, respectively.
Who Regulates the Peer to Peer Lending System in India?
In India, the Reserve Bank of India (RBI) regulates the Peer to Peer Lending platforms to protect the interest of lenders & borrowers. The Reserve Bank of India (RBI) made it mandatory for all the existing companies of P2P (Peer to Peer) to apply for Peer to Peer Lending License in case they want to continue working as a P2P platform.
According to the guidelines of the RBI, a lender cannot invest more than Rs. 10 lakhs across every Peer to Peer platform. Also, the RBI set a lending limit of up to Rs. 50,000/- which applies to the Borrower as well. The active participation of the Reserve Bank of India in the functioning of Peer to Peer Lending platforms aids in increasing the credibility of such companies. The RBI's amendments seem to have a significant impact on the operations for Peer to Peer platforms in India.
Types of Peer to Peer Lending Model
Following is the classification of Peer to Peer Lending Model into types of Lending:
- Consumer Lending: Small personal loans like cars or holidays or family/self-weddings or home repairs or repayment of credit card dues.
- Property Lending: This is secured Peer to Peer Lending against the 1st charge of the commercial or residential property. The loan is borrowed for personal mortgages, residential refurbishment, and developing commercial loans. This model is not popular in India.
- Small Business Lending: SME loans are provided to small businesses for the following purposes:
- Working Capital;
- Business Expansion;
- Asset Finance.
How does Peer to Peer Lending work?
- The particular party- Borrower or the Lender, gets registered with the online Peer to Peer lending portal by submitting the information asked by the Peer to Peer Lending Company.
- Post Registration, Due Diligence of the individual is conducted by the Peer to Peer lending.
- Parties with a positive report post the process of Due Diligence, which gets approval to create their profile on the portal. In this manner, they can reach out to other parties, interact with them and make the loan deal as per mutual agreement.
- The loans can be secured or unsecured and mostly do not come under the protection of government insurance.
- Some Peer to Peer Lending platforms can provide the facility of loan transfer like securities for the purpose of profit or debt collection.
Requirements for Getting Peer to Peer Lending License in India
The P2P lending platforms come under the RBI taking the definition of NBFCs under Section 45I(f)(iii) of the RBI Act.
- Prudential Requirements: A minimum capital of Rs. 2 crores is required.
- Governance Requirements: It comprises fit & proper criteria for Directors, CEO, and Promoters. The Board must also include a reasonable portion of members having a financial background. A physical place of business is also needed to be established in India, with the management mainly based in the country.
- Reporting Requirement: Such online entities must submit regular reports based on their financial position, loans arranged in each quarter, complaints received in each quarter etc., to the RBI.
- Loan Amount: The loan amount to one Borrower cannot exceed more than Rs. 1 million.
- Allowed Activity: The Peer to Peer platforms can be registered as an intermediary as their role is to bring the Borrower & Lender together without reflecting the borrowing & Lending in its Balance Sheet. The leverage to provide an assured return shall be prohibited, and the funds shall be directly transferred into the Borrower’s account from the Lender’s account to escape the threat of money laundering.
- Business Continuity Plan: Adequate risk management policy must be put in place by the platform acting as the custodian of cheques & agreements.
Conditions to obtain Peer to Peer Lending License
Reserve Bank of India requires the following conditions to be fulfilled by a Company for Registration as a Peer to Peer Lending Company:
- It should be incorporated in India.
- It should have all the essential entrepreneurial, managerial and technological resources to offer the Peer to Peer lending services to the participants.
- It should have a suitable capital structure to run a Peer to Peer Lending platform.
- Its Directors and Promoters should be proper and fit.
- The general character of the management of the Company should not be detrimental to the public interest.
- It should submit a plan for implementation of a secure Information Technology System; if the same has not been implemented already.
- It has submitted a feasible business plan to run Peer to Peer Lending portal.
- If the Company is granted the Certificate of Registration, the public interest would be served.
- Any other such condition may be notified from time to time by RBI, which ensures that starting or running such a business in India is not detrimental to the public interest.
For New Companies:
- If a new Company seeks CoR and fulfils all the conditions mentioned above, RBI can grant it in-principle approval to set up a Peer to Peer Lending platform upon fulfilment of such other conditions as the RBI may deem fit.
- The in-principle approval stands valid for a period of twelve months from the date which is granted to it.
- In the period of twelve months, the Company shall be required to set up its technology platform, perform all the legal documentation required and report all the compliances that were required to be made to RBI.
- If RBI is satisfied that the Company is ready to commence the operations of Peer to Peer Lending, it can grant the Certificate of Registration, subject to fulfilment of such conditions as it may deem fit.
Procedure for Obtaining Peer to Peer Lending License
Any entity wishful of commencing the business of P2P Lending & registered as a Public Limited Company or Private Limited Company can apply to RBI for the Peer to Peer Lending License. For this, they have to fulfil the following:
- A company should be registered as a Public Limited Company or Private Limited Company with the principal objective of financing;
- Minimum NOF (Net Owned Funds) of Rs. 2 crores;
- Mobile App or Website workflow;
- File the online application at the official website of the RBI (COSMOS);
- Submission of a copy of the application along with attached documents shall be submitted to the RBI Office;
- The Peer to Peer Lending License will be issued only after vigilant inspection of the application & documents attached to it.
Scope of Activities of Peer to Peer Lending Platforms
Peer to Peer Lending Companies can undertake the following activities:
- Provide an online platform to the participants involved in Peer to Peer Lending, thereby acting as their intermediary.
- They cannot raise deposits under the Companies Act, 2013 or under Section 45I(bb) of the RBI Act.
- They cannot lend on their own.
- They cannot provide or arrange any credit guarantee or credit enhancement.
- They cannot facilitate or allow any secured lending that is linked to their online platform. Permission has only been given for clean loans.
- They cannot hold the funds that are received from the lenders (for Lending) or from the borrowers (for servicing loans) in their own balance sheet.
- The Companies are not allowed to sell any product except the loan-specific insurance products.
- They are not permitted international flow of funds.
- The Companies are required to comply with all the legal requirements that are applicable to the involved participants under the relevant applicable laws.
- It is mandatory for the Companies to store and process the entire data related to their activities and participants on hardware that is located within India.
Responsibilities of P2P Lending Companies towards the Participants
The Peer to Peer Companies have the following responsibilities towards their participants:
- Undertaking due diligence on its participants prior to approving them as participants on the platform;
- Undertaking the risk profiling and credit assessment of the registered borrowers and disclosing the same to the registered lenders;
- Requiring explicit and prior consent of the participants to access their credit information;
- Undertaking documentation of the loan agreements and other relevant documents;
- Providing assistance in repayments and disbursement of the loan amount;
- Rendering services about the loan recovery for the loans that originated on the platform.
Funds Transfer Mechanism on Peer to Peer Lending Platforms
- On Peer to Peer Lending platforms, the funds shall be transferred between the participants via an Escrow account mechanism, which shall be operated by a Trustee.
- Minimum two Escrow accounts are required to be maintained- one for receiving an amount from the lenders where disbursal is pending and the other for borrowers.
- All the transactions will be made only via bank accounts. Cash transactions are completely prohibited.
Submission of Data to CICs by the Peer to Peer Lending Companies
Peer to Peer Lending Companies is mandatorily required to become members of the Credit Information Companies and submit the relevant data to them. This includes:
- It keeps the credit information of the borrowers and the lenders well-maintained and updates the same on such intervals, as decided between the Company and the CIC;
- Necessary measures that may be required to ensure the credit information provided by it is up to date, precise and complete;
- For the agreements with the participants, it shall include the relevant consent to provide the credit information.
Grievance Redressal of the Participants
A Peer to Peer Lending Company shall be required to put in place; a policy approved by the Board to address the complaints of the participants. These complaints shall be handled in the manner provided in the Board-approved policy but shall not be dealt with beyond the period of one month of the receipt of the complaint.
For the benefit of the participants, the following information shall be permanently displayed by the Company on its website:
- The Grievance Redressal Officer’s name and contact details. The participants can approach this Officer for the complaints against the Company.
- It shall also be displayed that if the complaints of the participants are not addressed within one month, they may appeal to the Customer Education and Protection Department of RBI.
FAQs of Peer to Peer Lending License
No, these electronic platforms do not come under the purview of NBFC-P2P directions since they only assist the banks, NBFCs and other regulated AIFIs in the identification of the borrowers.
Leverage ratio is the outside liabilities in the Balance Sheet, which can be used to raise dividends via its owned funds.
Investible funds refer to the capital infused in the business and the generation of surplus from the business of NBFC-P2P.
No, upfront infusion of the minimum capital is not required at the time of making the application for NBFC- P2P license.
The term “P2P Lending Platform” denotes a type of lending platform that connects borrower and lender with each other.
The in-principal approval given by the Reserve Bank of India would remain valid for a period of 12 months, starting from the date approval.
No, it is not allowed to use cash for transferring funds.
The safety of a Peer to Peer lending depends upon the factors, such as lending money to the low risk borrowers only after proper verification.
Swarit Advisors is a legal tech-driven platform that has a team of experienced professionals. Our experts will tackle all the legal intricacies on your behalf so please contact us for more information.
The demerits of P2P Lending platform for the Borrowers are loan amount is quite low as compared to banks, less security, and one often feels there are more borrowers and fewer lenders.
One of the major demerits of P2P Lending Platform for the Lenders is that the returns are lower in comparison to the finance option available in the open market.
The eligibility criterion includes that the company must be registered in India, must have resources, adequate capital structure, directors must satisfy fit and legitimate models, legitimate arrangement for proficient Information Technology System, Feasible Business Plan, and Intent to serve Public Interest.
If you want to know the process, then read our detailed service page mentioned above or visit Swarit Advisors for end-to-end assistance.
The chances of earning money with Peer to Peer lending are a lot higher when the individual put resources into borrowers with great credit.
Yes, P2P Lending is managed by the Apex Bank, i.e., Reserve Bank of India. Therefore, the same is now being considered as legal in India.
Yes, an individual can lend money for profit if the same has been done through various lending sites.
Any Indian resident who is above the age of 18 years, with a valid PAN and bank account can lend on the P2P Platform. Further, any NBFC listed by the RBI or companies incorporated under the Indian Companies Act can apply as lenders as well.
P2P lending assists lenders in earning interest on the idle money, which otherwise would not result in anything.
To become an investor, one needs to sign up and fill in the required details about himself/ herself and pay the registration fees by way of a debit card, credit card, or net banking, etc. After that, the registration will be verified within 12 to 24 hours. If approved, one can log on to his/ her account online and start lending.
The fee submitted is used for the verification of documents. Moreover, the same is used for legal agreement and documentation for loan disbursement as well.
The predictable rate of return ranges from 12 to 28%. However, the same depends on how one spread his/her investment. Further, returns depend on the ongoing demand for lenders on the platform as well.
An Individual can invest up to 20%. High net-worth Individuals can invest up to 50%, and Institutional lenders can invest up to 100% of the total loan amount demanded by an individual borrower.
In case of any default, the borrower will be charged with additional penal interest for the duration of delay in which he/she will be liable to pay directly to his/her lender.
Any Indian resident who is above the age of 18 years, with a valid PAN and bank account can borrow on the P2P Platform.
The documents required are CIBIL score, salary slips, bank statements, Income Tax Returns, etc.
The tenure of a loan can varies from 6 months to 36 months.
A borrower can choose both an unsecured and collateral based loan.
If it is for some personal use, then the loan amount can range from Rs 30000 to Rs 5 lakhs. However, if it is for business purposes, then one can apply for a loan of up to Rs 10 lakhs.