As a measure to systematise the lending system, the Reserve Bank of India issued the guidelines on October 4, to modulate Peer-to-Peer lending platforms. Under these guidelines, the peer-to-peer lending platforms will be regularised as Non-Banking Financial Companies (NBFCs). Peer-to-peer (P2P) platforms are lending marketplace for borrowers and lenders to converse and carry out loan transactions on mutually decided rates.
P2P platforms are seen as an alternative form of finance which has a broader reach than the conventional form of finance. As these platforms offer loans without the requirement of security, people are more attracted towards borrowing money from such platforms rather than banks which do not allow loan transactions without a collateral.
The registration criteria for a peer-to-peer lending platform to register as a Non-Banking Financial Company laid down by the Reserve Bank is as follows:
- It must have a capital of at least Rs. 2 crores, or as directed by the bank in future.
- It cannot borrow any amount itself.
- It is required to perform a Credit Assessment and Risk Profiling of every borrower and lender.
- It is required to maintain all the documents related to any loan agreement.
- It is required to provide support in disbursement and repayment of the loan amount.
- It cannot possess any balance sheet or funds.
- It is prohibited from cross-selling any products, with the exception of few insurance products.
- It is prohibited from permitting any international flow of funds.
The Central Bank has provided the time period of 3 months to existing P2P platforms to register as NBFC. The application for registration is to be filed with the Bank’s Department of Non-Banking Regulation, Mumbai.
Other requirements for a P2P to register as an NBFC is that it must be a technology-driven company registered under the Companies Act, 2013. No other kind of business is allowed to run a lending business. The NBFC will be allowed to carry out its lending business only after obtaining the Certificate of Registration from the RBI.
The Reserve Bank of India explained that lending on P2P platforms will now take place between the lender, borrower and the trust through a tripartite arrangement. The trustee will be required to maintain 1 escrow account for the lender and borrower each. No cash transactions are permitted on the P2P platform.
The P2P platform’s role will be to act as an intermediary and maintain the records of information exchanged between the lender, borrower and trustee. The P2P will have to mandatorily submit this data to Credit Information Corporations (CICs).
The in-principle approval by the Bank will be valid for 12 months from the date it is issued and the P2P has to finalise the requisite documentation in accordance with the terms of approval and inform the Bank about it within these 12 months.
The P2P is required to enact a Fair Practices Code on the basis of guidelines provided by the Central Bank and upload it on its website for the stakeholders. It is also required to enact a policy approved by the Board to address grievances. The complaints will have to be resolved within 1 month from the date of their receipt.
A Leverage Ratio is also required to be maintained by the P2P, which cannot be more than 2 and the aggregate exposure of a lender and aggregate loan by a borrower cannot be more than Rs. 10 lakh at a time. Similarly, the exposure of a lender to a single borrower cannot be more than Rs, 50,000 and maturity of a loan cannot exceed 36 months. The P2P has to obtain a certificate from either the borrower or lender which verifies that these limits are properly observed.
The guidelines by the Reserve Bank of India are issued to regulate and monitor the lending activities of P2P platforms and secure the interest of borrowers as well as lenders. These guidelines are expected to bring more transparency and accountability in unsecured loan activities taking place on these lending platforms.
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