Peer-to-Peer Lending

The Reserve Bank of India (RBI) has released a consultation paper on peer-to-peer (P2P) lending and proposed to bring such platforms under its purview by defining them as non-banking finance companies (NBFCs).
What is P2P lending?
P2P lending is a form of crowdfunding; an online platform that matches lenders with borrowers in order to provide unsecured loans. The borrower can either be an individual or a business requiring a loan. A fee is paid to the platform by both the lender and the borrower.
RBI’s proposal:
  • The central bank has proposed a minimum capital requirement of Rs 2 crore, and wants players not to offer any extraordinary returns.
  • The borrower can either be an individual or a business requiring a loan. A fee is paid to the platform by both the lender and the borrower.
  • The RBI has also stated that P2P lenders could act only as an intermediary, wherein none of the lending/borrowing gets reflected in their balance sheets.
  • It has also been proposed to make it mandatory for transfer of funds to take place directly from the lender’s bank account to that of the borrower.
  • The central bank also said confidentiality of customer data and data security would be the responsibility of the platform.
Why P2P regulation is necessary?
Although nascent in India and not significant in value yet, the potential benefits that P2P lending promises to various stakeholders and its associated risks to the financial system are too important to be ignored. Coming under the purview of the RBI will not only be a confidence booster for the sector, but also for individual lenders.
What areas does RBI guidelines focus?
RBI has proposed following key areas to frame the regulatory guidelines around P2P lending.
  1. Permitted activity;
  2. Reporting,
  3. Prudential and governance requirements;
  4. Business continuity planning and
  5. Customer interface.
Analysis:
  • Scope of permitted activities:
    The scope of permitted activities needs to be defined clearly, especially in view of the aggressive expansion plans of P2P players.For instance, what kind of advertisements can be displayed on the websites of these portals.
  • Regulation of Guarantees offered by intermediaries:
    There is a possibility that many lenders could get duped into investing because of the guarantee, which may be difficult to meet at a later date
  • Differentiation from other financial institutions:
    Some upper cap in transaction size is required to distinguish P2P lender from NBFCs and Conventional banks
  • Protect the stakeholders:
    The interests of stakeholders, especially lenders, in case the platform goes bankrupt, should be protected.There needs to be clarity on whether all contracts will continue to stay enforceable and how will investors be serviced.
What is the decision taken by Government on RBI proposal?
  • Peer-to-peer lending (P2P) platforms will be treated as non-banking financial companies (NBFCs) and thus regulated by Reserve Bank of India (RBI).
  • The notification will help P2P lenders to gain official recognition and opens new avenues for fund-raising and business expansion.
  • It also ends the regulatory vacuum in which P2P lending firms were operating.