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25 Sep 2017

RBI NOTIFICATIONS ON PEER TO PEER LENDING PLATFORMS: MORE CONFUSION THAN CLARITY

RBI NOTIFICATIONS ON PEER TO PEER LENDING PLATFORMS: MORE CONFUSION THAN CLARITY

Financial Newspapers (Sept.  21, 2017 edition) were widely reporting about the latest notification[1] issued by Reserve Bank of India which specified that a “non-banking institution that carries on the business of a peer to peer lending platform to be a Non-Banking Financial Company (“NBFC”).”

The Notification also clarifies that the term “the business of a peer to peer lending platform” shall mean the business of providing under a contract, the service of loan facilitation, via online medium or otherwise, to the participants who have entered into an arrangement with that platform to lend on it or to avail loan facilitation services provided by it.

Now, given the fact that the peer to peer (P2P ) lending platforms have in recent times made headlines and even the Regulator’s intent[2] being made clear to regulate this business, it’s important to break down the explanation of Peer to Peer lending platform to understand it better and the notification indicates that it should have the following 4 essential elements:

p2pblog

Now, the said Notification has no doubt put rest to a lingering doubt in the minds to such platform operators as to whether to form a NBFC to run such platforms or operate simply as a technology platform.

However, few important questions still await answer:

  1. What happens to all such platforms who have developed technology platforms to make discovery of borrowers and lenders easier and seamless?
  2. How much time such platforms would be given to either transform into a NBFC or shutdown their operations?
  3. Will such platforms be allowed to shut down without completing their existing contractual relationships?
  4. What will happen to a technology platform which offers B2B model whereby only NBFC’s are lenders?
  5. Why such peer to peer lending platforms be not considered as technology service providers like e-commerce platforms?

The much-awaited regulation from RBI in this regard may address such questions. However, it is important to note that the Consultation Paper on Peer to peer Lending by RBI has indicated the way forward as:

  1. To bring P2P lending platforms under the purview of Reserve Bank’s regulation by defining P2P platforms as NBFCs;
  2. To issue directions to such platforms regarding
    1. registration requirements
    2. prudential norms
    3. the permitted activity
    4. prudential regulations on capital
    5. governance,
    6. business continuity plan (BCP)
    7. customer interface
    8. regulatory reporting etc.

After this first step of notifying the P2P lending platforms to be considered as NBFC, the industry is waiting for necessary directions from RBI to see whether this nascent industry would thrive under the new regime or wither away on account of regulatory burden imposed.

[1] No. DNBR. 045/CGM (CDS)-2017 dated Monday, 24th August, 2017

[2] Consultation Paper on Peer to Peer Lending by Reserve Bank of India, April 2016

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