Mudra Compass

Recently, the Reserve Bank of India imposed stricter regulations on peer-to-peer lending platforms following instances where some of these entities breached existing rules. The banking regulator stated that these platforms are prohibited from assuming any credit risk, offering credit enhancement, or providing guarantees.

“An NBFC-P2P is prohibited from providing or arranging any form of credit enhancement or credit guarantee. Additionally, an NBFC-P2P must not assume any credit risk, either directly or indirectly, related to transactions conducted on its platform. In other words, any potential loss of principal, interest, or both, resulting from funds lent by lenders to borrowers through the platform, will be entirely the responsibility of the lenders,” stated the RBI in its master direction to the platforms.

The RBI has been increasing its scrutiny of the rapidly expanding consumer finance sector, including peer-to-peer (P2P) lending, to mitigate systemic risks and safeguard consumer interests. According to the banking regulator, an NBFC-P2P is prohibited from cross-selling any products other than those specifically related to loan insurance.

“An NBFC-P2P is required to publicly disclose the following information: the performance of its portfolio, including the share of non-performing assets (NPAs), on a monthly basis, with age segregation, on its website. This disclosure must also include any losses incurred by lenders on principal, interest, or both,” the RBI further stated.

Additionally, the RBI instructed that the P2P platform must not market peer-to-peer lending as an investment product with features such as tenure-linked assured minimum returns or liquidity options.

The RBI has set a limit on the total exposure of a lender to all borrowers across various P2P platforms, capping it at Rs 50 lakh, provided that these investments align with the lender’s net worth. Lenders investing over Rs 10 lakh across P2P platforms must present a certificate from a practicing Chartered Accountant to the P2P platforms, confirming a minimum net worth of Rs 50 lakh. Additionally, the RBI stated that P2P platforms are prohibited from using a lender’s funds to replace the funds of any other lender.

Let’s understand in detail about P2P Lending in India.

A P2P lending platform operates similarly to crowdfunding, where it gathers savings from individuals, Hindu Undivided Families (HUFs), and businesses. When a borrower submits a loan application, lenders have the opportunity to place bids in an auction to meet the borrower’s loan needs. The borrower has the discretion to accept or decline any of the bids.

The 2017 Guidelines for P2P Lending were established under the Reserve Bank of India’s (RBI) Master Directions for NBFC Peer-to-Peer Lending Platforms. According to these guidelines:

• Only Non-Banking Financial Companies (NBFCs) are permitted to operate as P2P lenders, provided they receive explicit authorization from the RBI.
• All existing P2P lending platforms, including those that are not NBFCs, are required to register with the Department of Non-Banking Regulation in Mumbai.
• P2P lenders must obtain a registration certificate from the RBI before they can commence operations.
• P2P platforms are mandated to maintain a minimum net-owned fund of Rs 20 million, in addition to meeting other criteria set by the RBI.
• The leverage ratio for P2P lenders is capped at 2, meaning that the total liabilities should not exceed twice the owned funds.

The Registration Process for Lenders and Borrowers on P2P Platforms

To participate in P2P lending, both lenders and borrowers need to register on a P2P lending platform. Each platform conducts its own screening tests and Know Your Customer (KYC) procedures to thoroughly verify the credentials of potential lenders and borrowers. For example, LenDenClub has established clear and stringent rules within its terms of service. In addition to the KYC verification, LenDenClub performs fraud checks, secures a credit rating from the Credit Information Bureau for users, and carries out residence or employment verification at the borrower’s workplace.

Conclusion

Peer-to-Peer (P2P) lending has emerged as a viable alternative for both borrowers and lenders in India, offering flexibility, accessibility, and the potential for higher returns. However, with the rapid growth of this sector, the Reserve Bank of India (RBI) has taken decisive steps to ensure that P2P platforms operate within a robust regulatory framework. By imposing stricter guidelines, the RBI aims to protect consumer interests, maintain financial stability, and prevent misleading practices.

As P2P lending continues to evolve, it remains crucial for participants to understand the regulations and choose platforms that adhere to these guidelines. This will not only safeguard their investments but also contribute to the overall credibility and sustainability of the P2P lending ecosystem in India.