Traditionally, financial institutions such as banks control the lending business where they offer loans to borrowers to meet various funding requirements. Banks come under RBI regulation. Over the years, RBI is increasingly regulating financial institutions other than banks such as NBFCs which include stand-alone housing finance companies.
Increasingly borrowers are shifting preference to NBFC’s over banks, who are flexible in giving loans and have quicker turnaround times over banks. This rising influence of NBFCs on the lending business, has made RBI bring NBFCs under its regulatory codes.
P2P Lending Platforms
Following in the footsteps of NBFCs, new organizations mushroomed that disrupted the lending industry positively using the latest advances in technology to match lenders with borrowers through online and other resources. These organizations used peer-to-peer (P2P) platforms to operate in a lending marketplace for loans. P2P platforms perform as alternatives to normal financial systems such as banks and NBFCs. The P2P platforms are gaining currency among both lenders and borrowers as they offer to link up people with surplus funds to people requiring funds. P2P platforms are becoming very attractive to individual borrowers and small businesses as they offer quick linking and better terms without too much of hassles. The P2P platforms offer advantages such as
- Providing higher returns to lenders
- Loans without collateral at lower rates of interest than banks and NBFCs
- Reverse auction process – lenders can bid on proposals from borrowers
- Quicker processing
- Credit assessment
- Facilitating loan process
- Assisting in recovery
Notwithstanding the many advantages, P2P lending offers, small borrowers still would need to repay the loans. Unfortunately, if there is a delay in repayment it is possible that small borrowers could face hardships from either the P2P platforms or the lenders.
P2P platforms use existing systems, procedures and policies of the banking industry such as credit scores, KYC norms and normal banking channels to conduct business.
The RBI decided to regulate the business of P2P lending because financial transactions involving individual borrowers and small business borrowers with P2P platforms are increasing with possibility of coercion by some unscrupulous elements in the system. The vulnerability of small borrowers to accept loans with harsh terms and conditions including higher interest rates is high especially when these borrowers are unable to get funding from traditional channels for whatever reason. At the same time, lenders using the platform could face difficulties in recovering the monies advanced. Thus, RBI stepped in to regulate the operations of P2P lending business.
With the RBI issuing notification on P2P lending platforms, these platforms now come under the umbrella of NBFCs, which the RBI is regulating on lines similar to banks.
Main Provisions of Master Directions – Non-Banking Financial Company – Peer to Peer Lending Platform (NBFC-P2P) (Reserve Bank) Directions, 2017
The RBI issued its directions regulating the operations of NBFC-P2P lending platforms in October 2017 and key provisions are
- The directions apply to a separate class of NBFCs known as Non-Banking Financial Company- Peer to Peer Lending Platform (NBFC-P2P)
- Directions regulate registration and operation of NBFC-P2Ps
- Eligibility criteria – only companies (not any other type of ownership) to operate, new platforms to operate only after registration, existing platforms to register within 3 months, to have net owned fund of not less than rupees twenty million
- Prudential norms – maintenance of leverage ratio not exceeding 2, caps on exposure and lending and borrowing and maturity periods
- Fund transfer mechanism through escrow and operated by the trustee
- Only bank transactions allowed – no cash transactions
- Submission of information to credit information bureaus mandatory
- Transparency and disclosure requirements – details on identity, interest rate, loan amount, credit score, terms and conditions of loan, fees and taxes
- Grievance redress system – company board approved system
The RBI’s directions are exhaustive and may undergo changes as the P2P lending business grows in size and reach. The regulations are a welcome measure to protect the interests of both lenders and borrowers and P2P lending platforms.