What is Peer to Peer Lending?
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.
What are the key characteristics of Peer-to Peer lending portals?
- These are the online portals that match the borrowers with the lenders.
- There is no requirement of 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.
How does Peer to Peer Lending work?
- The particular party- borrower or the lender gets registered with the online P2P lending portal by submitting the information asked by the P2P lending Company.
- Post Registration, Due Diligence of the individual is conducted by the P2P lending.
- Parties who have a positive report post the process of Due Diligence which gets an approval to create their profile on the portal. In this manner, they can reach 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 P2P Lending platforms can provide the facility of loan transfer like securities for the purpose of profit or debt collection.
What is Peer to Peer Lending License?
P2P Companies are basically online portals that aid the borrowers and lenders coming together without any need of an intermediary. P2P companies are registered under the Companies Act, 2013.
For any Company that desires to run the business of P2P Lending needs to obtain P2P License from Reserve Bank of India by making an Application and submitting the relevant documents, as required.
What is the funding process under P2P Lending?
The funding process under Peer to Peer Lending can be via following modes:
On the P2P platform, the lenders shall compete with each other to fund the loan requirements of the borrower by offering loan at low rates on interest. The borrower can then choose the lender who fulfills his/her loan requirements appropriately. The borrower can also borrow more than one loan from different lenders depending on the amount of the loan and the rate of interest.
Fixed Rate Auction
In this method, the loan amount has to be funded by the lender while the rate of interest remains fixed. This is a very convenient method for the lenders.
In this method, the loan requirement of the borrower is underwritten by the platform itself or its finance/bank associates. Once the loan amount has been underwritten, a loan ID is generated and the same is provided to the lender. If the lender finds it appropriate, he can lend the loan to the borrower.
What is an eligibility criteria to run Peer to Peer Lending business?
- Peer to Peer Lending business can be run only by Registered Companies or NBFCs in India.
- Any Company that wishes to have the Certificate of Registration for Peer to Peer Lending business must have the Net worth of INR 2 crores.
- In case a Company was already running such business before CoR was made mandatory, then such Company shall fulfill all the conditions, as laid down by RBI.
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 P2P Lending Company:
- It should be incorporated in India.
- It should have all the essential entrepreneurial, managerial and technological resources to offer the P2P lending services to the participants.
- It should have the 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 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, public interest would be served.
- Any other such condition, as may be notified from time to time by RBI, which ensures that starting or running of such business in India is not detrimental to the public interest.
For new Companies:
- If a new Company seeks CoR and fulfills all the conditions mentioned above, RBI can grant it in-principle approval to set up a Peer to Peer Lending platform, upon fulfillment of such other condition 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 documentations 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 fulfillment of such conditions, as it may deem fit.
What is the scope of activities of P2P Lending platforms?
P2P 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 Companies Act, 2013 or under Section 45I(bb) of 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 its activities and participants on hardware that is located within India.
Responsibilities of P2P Lending Companies towards the participants
The P2P Companies have the following responsibilities towards its 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 its credit information;
- Undertaking documentation of the loan agreements and other relevant documents;
- Providing assistance in repayments and disbursement of the loan amount;
- Rendering services pertaining to 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 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
P2P Lending Companies are 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 update 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.
Transparency and disclosure requirements of P2P Lending business
A Peer to Peer Lending Company shall be required to disclose the following to the lender:
- The details pertaining to the borrower’s personal identity, rate of an interest sought, loan amount required and the credit score.
- The details pertaining to the terms and conditions related to the loan such as return, taxes and the fees.
The following disclosures are to be made to the borrower:
- The details pertaining to the amount proposed by the lender and the rate of interest offered.
It is not mandatory to disclose the personal identity and the contact details of the lender to the borrower.
The following details shall be disclosed on the website of the Company publicly:
- Grievance Redressal Method
- Elaborate Business Model
- Portfolio Performance on a monthly basis, which includes details of non-performing assets
- Disclosures on usage and protection of user data
- Outline of credit assessment and factors considered for the same
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 Customer Education and Protection Department of RBI.
Frequently Asked Questions (FAQs)
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 identification of the borrowers. However, if the retail lenders use the platform for the lending purposes, the same would have to be registered as NBFC-P2P.
In case of NBFC-P2P Lending platforms, Leverage ratio is the outside liabilities in the Balance Sheet which can be used to raise dividends via its owned funds. Borrowing of customer funds via the platform is not considered as an outside liability of the platform.
Investible funds refer to the capital infused in the business and the generation of surplus from the business of NBFC-P2P. The funds of the lenders and the borrowers that flow through an Escrow account are not included in it. The funds lent by the customer via the NBFC-P2P platform cannot be used by the platform.
No, upfront infusion of the minimum capital is not required. The list of Promoters and the source of funds to raise the capital of 2 crores should be provided by the applicant. The capital has to be infused before the Certificate of Registration is issued. Later on, no change in Promoters will be allowed.