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12 Oct 2017

WHAT YOU NEED TO KNOW ABOUT PEER TO PEER (P2P) LENDING PLATFORMS

WHAT YOU NEED TO KNOW ABOUT PEER TO PEER (P2P) LENDING PLATFORMS:

MASTER DIRECTIONS BY RESERVE BANK OF INDIA (RBI)

Reserve Bank of India (RBI) on Oct. 4, 2017 issued a Master Direction[1] regarding the various registration/eligibility/compliance norms for P2P Lending Platforms which was a follow up action to the notification[2]  issued on 24 August, 2017 wherein RBI 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”).”

Let’s now evaluate what these P2P Master Directions have in store for the existing P2P Lending Platforms as well the potential entrants to this sector including its participants. This Article is written in the format of questions and answers for ease of reading.

1. What is a P2P Lending Platform?

Please refer to my previous Blog on the same which dealt with the definition here.

2. What kind of entities can start a P2P Lending Platform and is there is a minimum capital requirement?
  • To start a P2P Lending Platform, the only form of entity permissible is a “COMPANY”.
  • Each such Company needs to be non-Banking Financial Company (“NBFC”), there is a minimum net owned fund (NOF) of Rupees 2 Crore (or Rupees 20 Million).
3. Do these P2P Lending Platforms require registration with RBI?
  • YES, P2P Lending Platforms needs to register themselves with RBI.
  • Based on the prescribed norms, RBI shall be issuing an in-principle approval for a period of 12 months.
  • Within the said period of 12 months, P2P Lending Platform needs to put in place technology platform in with all other legal documentation and based on meeting the norms satisfactorily, RBI mat issue a Certificate of Registration (COR) to function as NBFC-P2P.
4. Can foreign companies take NBFC-P2P registration?
  • NO, only a Company registered in India is permitted to undertake this activity.
5. What will happen to the existing P2P Lending Platforms? Do they get any transition time?
  • The existing players have been given 3 month’s time and they can continue operations till such application for CoR is rejected.
  • Failure to apply for NBFC-P2P registration would make such existing platforms in default of the P2P Master Directions, if they still continue their business.
6. Is there any monetary limit on transactions for P2P Lending Platform?
  • YES, a single lender can only lend Rs. 50,000 to a same borrower (across platforms).
  • A single lender can’t extend loans more than Rs. 10 lakhs (Rupees 1 Million) to all borrowers (across platforms)
  • A borrower can’t borrow more than Rs. 10 lakhs (Rupees 1 Million) from all lenders (across platforms)
7. Are there any eligibility prescribed for borrower or lender on P2P lending platforms?

No

8. Is there any cap on interest rate?

No

9. Can such P2P Lending Platforms lend on their own?

No

10. Can P2P Lending Platforms facilitate secured lending?

No

11. Can P2P Lending Platforms allow international flow of funds

No

12. Can P2P Lending Platforms raise deposits?

No

13. How fund transfer would take place?
  • Fund transfer through P2P Lending Platforms shall take place through Escrow Account mechanism. No cash transaction is permitted.
  • The Escrow Account shall be operated by trustee which shall mandatorily be promoted by the Bank maintaining the Escrow Accounts.
14. Will the transactions get reflected in the balance sheet of the P2P Lending Platforms?

NO, P2P Lending Platforms shall not hold on its own balance sheet, the funds received for lending/servicing loans from lenders/borrowers respectively.

15. Can P2P Lending Platforms receive FDI?

Yes, P2P Lending Platforms being NBFC can receive foreign direct investment (FDI) in accordance with the prevailing FDI regulations.

16. Are there any approvals required for allotment of shares/transfer of shares or for any change in control in the P2P Lending Platform?
  • YES, any allotment or transfer of shares which make anyone holding or crossing the threshold of 26% or more in the paid up share capital would require a prior written permission from RBI.
  • Takeover or acquisition of P2P Lending Platforms or change in management resulting in change of >30% in the Board of Director of the P2P Lending Platforms shall also require the prior permission.
  • A public notice or at least 30 days in two prominent newspapers (English & vernacular) is also required after getting the necessary permission from RBI.
 17. What are the responsibilities on P2P Lending Platforms?
  • Carrying out Due Diligence of participants i.e. borrowers & lenders
  • Credit assessment and risk profiling
  • Documentation of loan agreements/related agreements
  • Assistance in disbursement and repayment of loan amount
  • Services for recovery of loans
  • Ensure that legal requirements for participants are adhered.
  • Submit data to all Credit Information Companies.
 18. What are the data security provisions applicable to P2P Lending Platforms?
  • P2P Lending Platforms to submit a plan for or implemented a robust and secure IT System at the time of making the application
  • The storage and processing of data at hardware located in India
  • Board approved Business Continuity Plan
  • Audit of Information Systems once in two years by CISA certified external auditors
  • Master Direction on IT Framework dated June 8, 2017 for NBFC to be complied.

[1] Master Direction DNBR (PD) 090/03.10.124/2017-18 dated October 04, 2017

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

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