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Reserve Bank of India issues Master Directions for regulating Peer to Peer Lending Platforms in India
In April 2016, the Reserve Bank of India (RBI) issued a consultation paper on Peer to Peer (P2P) Lending, providing an overview of business models that are operational both domestically and internationally, and assessing the need to regulate such business models operating in India, considering the impact that it can have on the traditional banking channels and the non-banking financial company (NBFC) sector.
After a year-long wait, on 24 August 2017, with the approval of the Central Government, the RBI notified non-banking institutions carrying on the business of a peer to peer lending platform to be NBFCs.
Pursuant to this notification, on 4 October 2017, the RBI issued Master Directions9 providing the framework for registration and operation of NBFCs that carry on/propose to carry on the business of a P2P lending platform. These Master Directions shall come into force with immediate effect.
With the advent of online industry, Peer to Peer (P2P) lending has emerged as a growing market over the years, globally and in India, and has the potential to bring changes in the traditional lending landscape.
P2P lending platforms are basically online platforms that act as an intermediary to match lenders with borrowers in order to provide unsecured loans.
Considering the significance of and the risks associated with the online industry and the impact which it can have on the traditional banking channels/ Non-banking Financial Companies (NBFCs), the Reserve Bank of India (RBI) considered it necessary to have an explicit framework in place to regulate the P2P lending platforms in India.
With this intention, the RBI issued a consultation paper on P2P lending in April 2016, providing an overview of various business models that are operational both domestically and internationally and assessing an urge to regulate such business models.
In order to regulate the P2P lending platforms, the Department of Non-Banking Regulation of the RBI, after receiving approval from the Government of India, on 24 August 2017, notified a company who undertakes ‘the business of a peer to peer lending platform’ to be designated as an NBFC.
Pursuant to this notification, on 4 October 2017, RBI has issued Master Directions providing the frame-work for the registration and operation of NBFC-P2P Lending Platform (NBFC-P2P).
Salient Provisions of the Master Directions Key definitions
‘P2P lending platform’ has been defined to mean an intermediary providing the services of loan facilitation via online medium or otherwise, to the participants.
‘Participant’ is defined to mean a person who has entered into an arrangement with an NBFC-P2P to lend on it or to avail of loan facilitation services provided by NBFC-P2P.
- Only companies which have sought prior approval from RBI to be NBFC-P2P can undertake business of P2P Lending Platform.
- Existing companies undertaking the business of P2P lending platform shall apply for registration as NBFC-P2P within three months from the issuance of the Master Directions.
- Every company seeking registration with the RBI shall have net owned funds of not less than INR 20 million or such higher amount as RBI may specify.
Scope of activities
NBFC-P2Ps shall –
- act as an intermediary providing an online marketplace or platform to the participants involved in P2P lending;
- not raise deposits as defined by or under Section 45I(bb) of the Reserve Bank of India Act, 1934 (RBI Act) or the Companies Act, 2013;
- not lend on its own;
- not provide or arrange any credit enhancement or credit guarantee;
- not facilitate or permit any secured lending linked to its platform;
- not hold, on its own balance sheet, funds received from lenders for lending, or funds received from borrowers for servicing loans;
- not cross sell any product except for loan specific insurance products;
- not permit international flow of funds;
- ensure adherence to legal requirements applicable to the participants as prescribed under relevant laws.
- store and process all data relating to its activities and participants on hardware located within India.
Also, NBFC P2Ps shall –
- undertake due diligence of participants;
- undertake credit assessment and risk profiling of borrowers;
- require explicit consent of the participant to access its credit information;
- undertake documentation of loan agreements and other related documents;
- provide assistance in disbursement and repayment of loans and render services for recovery of loans originated on the platform.
Regulating the P2P business model would certainly build confidence amongst various stakeholders and also bring in competitiveness in the market vis-à-vis traditional lending channels. Having said that, certain aspects of the Master Directions do require further clarifications and certain relaxations by the RBI to ensure growth in this industry