Peer to peer (P2P) lending
Peer to peer (P2P) lending is a form of crowdfunding used to raise unsecured loans which are re-paid with interest. Crowdfunding refers to financing of projects with small amounts of money raised from a large number of people, with a portal serving as an intermediary. It utilises an online platform which serves as a link between borrowers and lenders.
In terms of international experience, it is observed that while countries such as Israel and Japan do not permit such lending, others such as Canada and the United Kingdom regulate it as an intermediary while countries such as Germany and Italy regulate these platforms as banks due to their credit intermediation functions.
The borrower could be an individual or a legal person (such as a company). The companies generally follow a reverse auction model in which the lenders bid for a borrower's loan proposal and the borrower has the freedom to either accept or reject the same. Further, the interest rate could be determined by the platform or agreed to by the borrower and the lender. The said platform receives fees from the borrower and the lender and sometimes provides additional facilities like preliminary assessment of borrowers’ creditworthiness, collecting loan repayments /post-dated cheques etc. Some regulators specify that the money be transferred from the lender’s bank account straight to the borrower's account.
P2P Platforms in India
RBI vide a Notification on 24th August, 2017, enabled P2P entities as Non-Banking Financial Company (NBFC). However, an existing NBFC will not be able to operate as an NBFC-P2P. As per this Notification P2P lending platform shall mean the business of providing under a contract, the service of loan facilitation, via online medium or otherwise, to the participants who have entered into an arrangement with that platform to lend on it or to avail of loan facilitation services provided by it.
RBI’s Master Directions for peer to peer (P2P) lending platforms were issued on 4th October, 2017. The Master Directions provide a framework for the registration and functioning of NBFC-P2Ps in India. They specify the process and eligibility criteria for registration of such platforms and also state that such lending platforms cannot be operated without obtaining a Certificate of Registration from the RBI.
As per RBI’s Directions, these P2P platforms are to act as intermediaries providing an online platform to the participants. However, they are not allowed to raise deposits, provide loans, provide any credit enhancement or credit guarantee or facilitate or permit any secured lending. Further, the platforms are also not permitted to hold, on their balance sheet, funds received from lenders for lending, or funds received from borrowers for servicing loans. In addition, the platforms are also prohibited from permitting any international flow of funds.
The responsibilities of these platforms, as stated in RBI’s Directions, include the following:
- To undertake due diligence on the participants.
- To undertake credit assessment and risk profiling of the borrowers and disclose the same to their prospective lenders.
- To receive prior and explicit consent of the participant to access its credit information.
- To undertake documentation of loan agreements and other documents.
- To provide assistance in disbursement and repayment of loan amount.
- To facilitate recovery of loans originating on the platform (by using fair means).
Minimum networth requirement for these platforms is kept at Rs. 2 Cr. The borrower can either be an individual or a legal person (say a body of individuals, a HUF, a firm, a society or any artificial body, whether incorporated or not) requiring a loan.
RBI Directions stipulate that the aggregate exposure of a lender across all P2P platforms should not exceed Rs.10 lakhs while the aggregate loans raised by a borrower across all P2P platforms should not be more than Rs. 10 lakhs. Further, the maximum exposure of a single lender to the same borrower is fixed at Rs.50,000. It is also stipulated that the maturity of the loans shall not exceed 36 months. The maximum exposure limits are set low, given that all loans raised on these platforms are of unsecured nature and also given that these platforms provide no guarantee of repayment of loans. The Fair Practices Code included in the Directions specifies that the platform shall not provide any assurance for the recovery of loans and that ‘there exists a likelihood of loss of entire principal in case of default by a borrower’.
The interest rate is not to be fixed by the platform. The interest rate for each and every loan is to be fixed separately over the electronic platform by way of a mutual agreement between the borrower and lender. Fund transfer between participants on the P2P lending platform will happen through escrow account mechanisms. All fund transfers shall be through and from bank accounts, and cash transactions are strictly prohibited.
With RBI regularising P2P, more lenders and borrowers will start using P2P for loans, which will expand the market in future. It is believed that this platform can bring the money lenders to a formal platform by making borrowing / lending through banking channels. Small lenders will get an avenue to lend the surplus funds in a transparent manner which will yield higher rate of return as compared to bank deposits. NBFC status brings in a lot of credit information into the system but compliances for these platforms would marginally go up as with any case of regulation.
Faircent, i2ifunding, Peerlend, Lendbox, Rupaiya Exchange, LenDen Club are some of the existing P2P platforms in India. Existing platforms were given three months’ time to apply to RBI for registration.