Peer to Peer (P2P) Lending in India

Peer to Peer lending (P2P lending) is one of the methods of obtaining finances for your business. P2P functions as an online platform offering ease of access, flexibility and choice of lending and borrowing for lenders and borrowers. P2P model aggregates lenders and borrowers, facilitates the matching of lenders with borrowers.

Lenders can get earn interest higher than from bank savings, while the borrowers can obtain funds at an interest rate lower than banks.

P2P business model 

The P2P lending model is based on the crowd-funding model. Most of the P2P lending platforms are organised as NBFC (Non-Banking Financial Companies) fintech companies. Unlike traditional banking and financial institutions, the P2P model is a modern credit model to meet current business credit needs. A few P2P platforms offering services include Faircent, Paisadukaan, Finzy, Rupeecircle, and so on.

The P2P lending offers a platform for aggregation of all types of savings from individuals, high net worth (HNI), Hindu Undivided Families (HUFs) and other non-banking institutions. Under the P2P business model, an auction is conducted where the lender can make a bid for a borrower’s loan requirements and the borrower can either accept or reject the bid. Further, the platform can offer services such as credit assessment, recovering loans, and so on. The platform generally co-ordinates the transaction between the lender and the borrower.

RBI regulations 

Any person including an individual, a body of individuals, a HUF, a firm, a society or any artificial body, a company can participate in the P2P lending platform. The P2P lending is regulated by the Master Directions for NBFC Peer to Peer Lending Platform issued by the RBI in 2017. Only an NBFC can register as a P2P lender with the permission of RBI. Every P2P lender should obtain a certificate of registration from the RBI. Every existing and non-banking NBFC-P2P should register with the Department of Non-Banking Regulation, Mumbai. Further, the P2P should have a net owned fund of at least 20 million and meet other conditions laid down by RBI. P2P lenders shall maintain a leverage ratio not exceeding 2.

How can a borrower use the P2P model? 

The lenders and the borrowers have to register on the website of the P2P lending platform. The platform conducts a screening of the potential borrowers and lenders before allowing them to participate in their business. The P2P carries out a KYC process for verification of the borrowers.

Conditions for registering as P2P

• The company should be incorporated in India, and have necessary technological, entrepreneurial and managerial resources to offer P2P lending services to the participants.
• The company should have an adequate capital structure and management to undertake the business of P2P lending.
• The company has submitted a business plan for conducting the business of Peer to Peer Lending Platform.
• The company is granted a Certificate of registration (CoR) to serve in public interest.
• Any other condition as may be mentioned by the bank for the purpose of commencement of the business or for carrying on the business in India.

On the satisfaction of the conditions mentioned above, the RBI grants in-principle approval for setting up of P2P lending platform. The approval will remain valid for 12 months within which the platform should put in place the technology and documentation to commence operations. The RBI may, after it is satisfied that the P2P platform is ready to commence operations, grant a CoR as an NBFC P2P, subject to conditions as deemed fit by the bank.

Nature and scope of P2P lending business

• A P2P lender can act as an intermediary providing an online marketplace or platform to the participants.
• A P2P lender shall not raise deposits under Section 45I(bb) of the RBI Act, 1934 or the Companies Act, 2013.
• A P2P lender cannot lend on its own, cannot provide or arrange any credit enhancement or a credit guarantee.
• A P2P lender cannot lend on its own, cannot allow an international flow of funds or cross-sell any item except for loan-specific insurance products.
• A P2P lender should ensure that the participants adhere to the legal requirements prescribed under various applicable laws.
• Process all data concerning its activities and participants and maintain storage of the data on hardware located within India.

P2P business loan policy 

P2P should have an approved policy setting the eligibility criteria for participants, the price for the P2P services, rules for matching of lenders with borrowers. The loans between lenders and borrowers have to be approved with a signed contract.

The P2P loans are unsecured. P2P shall disclose on its website the method of credit assessment and factors considered by it, grievance redressal mechanism, an overview of the business model, contact details of grievance redressal officer, and so on.

Guidelines for P2P participants 

A P2P lender should carry out due diligence of its participants, do a credit assessment and risk profiling of the borrowers on its platform and disclose the details to prospective lenders on the platform. A P2P lender should obtain prior and explicit consent from the participant to access their credit information and have documentation of loan agreements and related documents. A P2P lender should also assist in the disbursement, repayments and recovery of the loans.

The transfer of funds in the P2P platform will be through the mechanism of escrow account operated by a bank promoted trustee. The P2P should maintain two escrow accounts, one for receiving the funds from lenders, and another for collections from borrowers. P2P shall not deal in cash transactions.

What are the borrowing and lending limits? 

The amount lent can be a minimum amount of Rs 500-750. The maximum amount per lender is capped (in the aggregate) across all P2P platforms at Rs 50,00,000. However, if a lender lends above Rs 10,00,000, a certificate from a practising Chartered Accountant certifying minimum net-worth of Rs 50,00,000.

In a one on one lending, the amount lent by a single lender to a particular borrower should not exceed Rs 50,000. The P2Ps should obtain a certificate from the borrower or lender stating therein that the borrowing and lending limits are adhered to.

Tenure for lending and disclosure requirements 

The maximum tenure for the amounts lent under P2P lending is fixed at three years. A P2P has to disclose to the lender the details of the borrower, including the credit score and details of the terms of the loan. A P2P has to disclose the details of the lender to the borrower other than the personal identity and contact details.

Compliance with Credit Information Companies (CIC) and others 

A P2P should become a member of all CICs. The P2Ps obligations include submitting data (including historical data), keeping and maintaining credit information, updating the information on a monthly basis to the CICs. The P2P is also required to file certain quarterly statements with the RBI such as the statement of loans disbursed, outstanding and closed during the quarter. Also, a statement of funds held in the escrow account.

Default in repayment of P2P loans 

The P2P is responsible for the recovery of the loans granted using their platform. The P2P should have a robust process for screening of participants, updating data to minimise loan repayment defaults. The P2P can also render services for recovery of loans granted under their platform.

However, the P2P is responsible for the actions of its service providers, including recovery agents. The P2P should also maintain the confidentiality of information pertaining to its participants that is available with its service providers.

Cancellation of registration of P2P NBFC

The RBI may, in the following cases, cancel the registration:
– P2P NBFC ceases to carry on business as a P2P lending platform in India.
– Failure to comply with conditions subject to which CoR is issued.
– P2P is no longer eligible to hold the CoR.
– Failure to comply with any direction issued by the bank.
– Failure to maintain accounts, publish and disclose financial position as required under any law or order or direction issued by the RBI.
– Failure to submit or offer for inspection books of account or other relevant documents when so demanded by the RBI.