[Guest post by Samrudhi Chothani, an Associate at Bharucha and Partners, Mumbai and Saurav Roy, a IV B.A.LL.B student at the ILS Law College, Pune. Views are personal]
The Peer to Peer (“P2P”) Lending sector is one with tremendous potential and requires robust regulation. P2P lending is similar to crowd-funding, where persons who want loans are connected with interested lenders. The loan amount is eventually repaid, along with interest. The borrower may either be a person or a legal entity (e.g., a company) and the rates of interest may either be set by the online P2P platform or both the parties to the loan agreement.
Reserve Bank Directions
The Reserve Bank of India (“RBI”) released the Non-Banking Financial Company – Peer to Peer Lending Platform (Reserve Bank) Directions, 2017 (“Master Directions”) on 4 October 2017. These are to come into effect immediately. These guidelines follow a Consultation Paper released by the banking regulator a year ago and a decision last month to regulate P2P platforms as Non-Banking Financial Companies (“NBFC”s).
a. Fund Transfers
Annexure I of the Master Directions details the fund transfer process on a P2P lending platform. The mechanism involves a tripartite agreement between the trust, borrower, and lender. The trustee shall be responsible for the management of two accounts (escrow, maintained with a bank). The first account shall be used by the lender to deposit all the money for the specified borrower, and the second account is to enable the borrower to make all its repayments, which shall be transferred to the lender. It is pertinent to note that the platform will merely work as a facilitator for borrowers and lenders in an open market.
The salient features of the Master Directions are described below:
- Scope of Activity
– The NBFC-P2P can act as an online intermediary and marketplace for all interested participants in the P2P lending process.
– The NBFC-P2P shall be required to maintain and store all data with regard to its activities in hardware situated in India.
– The NBFC-P2P cannot raise deposits (as defined in the Companies Act, 2013) or lend on its own and it is disallowed from permitting international flow of funds.
– The NBFC-P2P cannot cross-sell any other products apart from loan specific insurance products and cannot provide any credit enhancement or credit guarantee.
– The NBFC-P2P can only deal in clean loans i.e. it cannot permit secured lending linked to its platform.
- Prudential Norms
– The cumulative exposure of any lender to all borrowers across all P2P platforms shall not exceed a cap of INR 10 lakh.
– Maturity period of loans cannot exceed 36 months.
– The exposure of a single lender to the same borrower across all P2P platforms cannot exceed INR 50,000.
NBFCs seeking to work as P2P platforms shall be required to obtain a Certificate of Registration from the RBI, subject to a minimum net-owned fund of INR 2 crore.
The Master Directions provide much-needed closure on the issue of regulating the P2P sector. However, even though the Directions make reference to an interest percentage (charged on the loan) to be disclosed mandatorily, there remains a lack of clarity on the method of computing such percentage.
– Samrudhi Chothani & Saurav Roy