P2P Lending

Since the invention of money, individuals and institutions (lenders) with money have been lending to people and businesses in need of money (borrowers). In India Informal Finance has always been the biggest source of funding. There are many private lenders from many years who have been servicing alternative lending market. The Marwari and Baniya community have been very active in this space for a long time. However, most of this financing is achieved by mobilising existing social relationships like friends, family, or professional acquaintances since financing has a lot to do with Trust.

The explosive growth of the internet and social networks has enabled the creation of a whole new way of financing – P2P Lending, an online marketplace that act as intermediaries between lenders and borrowers. This means that borrowers and lenders do not need to have existing social relationships with each other to make a transaction happen. Instead, the transaction is based on the credit information of the borrowers as well as the underlying assets backing the loan (Like it should be).

In order to avail the service, borrowers are required to pay a fixed origination fee, while lenders often have to pay an administration fee, depending on the terms of the P2P lending platform. The interest rates are usually determined by the platform, sometimes the rates are set as per mutual agreement between the lender and the borrower. 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.

By eliminating the need for intermediaries, social lending platforms manage to offer high returns on investments as well as low - interest rates for borrowers, irrespective of market conditions.

Read more on our blog about incredible growth prospects in P2P lending.

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.

Some of these restrictions/conditions are as follows:

A P2P Lender:

• Can act as an intermediary providing an online marketplace or platform to the participants.
• Shall not raise deposits under Section 45I(bb) of the RBI Act, 1934 or the Companies Act, 2013.
• Cannot lend on its own, cannot provide or arrange any credit enhancement or a credit guarantee.
• Cannot allow an international flow of funds or cross-sell any item except for loan-specific insurance products.
• Needs to mandatorily process all data concerning its activities and participants and maintain storage of the data on hardware located within India.
• Should have an approved policy setting the eligibility criteria for participants, the price for the P2P services, rules for matching of lenders with borrowers.
• Should ensure that the loans between lenders and borrowers are approved with a signed contract.
• 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 etc.
• With consent, the company should have access to credit information for the participants
• Only Indian companies registered under Companies Act 2013 with a net worth of ₹2 crore can apply for a Certificate of Registration (NBFC) from Reserve Bank of India which is needed to conduct P2P lending business.
• The loan period shall not be more than three years.
• No international parties shall be involved.
• No secured lending will be facilitated.
• The lending shall not be direct, but through two escrow accounts, one for lenders and one for borrowers.
• The company shall remain liable for actions of recovery agents and others.
• 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, a statement of funds held in the escrow account.

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 of a P2P Platform?

• Minimum Amount lent can be as low as ₹500.
• No Lender can lend more than ₹50 lakhs (in aggregate) across all P2P platforms.
• If a lender lends above ₹10 lakhs, a certificate from a practicing Chartered Accountant is required certifying minimum net worth of ₹50 lakhs.
• In a one on one lending, the amount lent by a single lender to a particular borrower should not exceed ₹50,000
• No borrower can borrow more than ₹10 lakhs.

Tenure for lending and disclosure requirements
The maximum tenure for the amounts lent under P2P lending is fixed at three years. A P2P platform has to disclose to the lender the details of the borrower such as the credit score, terms of the loan etc. excluding any personal contact information.
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, a statement of funds held in the escrow account.

Default in repayment of P2P loans
The P2P platform is required to have a robust process for screening of participants to minimise loan repayment defaults and can render services for recovery of loans granted under their platform as well. However, P2P platform is responsible for the recovery of the loans granted using their platform along-with the actions of its service providers, including recovery agents. The P2P platform should also maintain the confidentiality of information pertaining to its participants that is available with its service providers.

India currently has about 30 online P2P lending platforms. Some of these are Lendbox (Our Partner), i2ifunding, Faircent, Monexo etc. In 2018, as many as 11 P2P players received the RBI licence to operate as an NBFC - P2P company.
RBI in its master directions has defined NBFC - P2P as a non - banking institution which carries on the business of a peer - to - peer lending platform. The estimated P2P lending to be generated in India over the next 5 years is pegged at around $4 bn. Whereas in China, the P2P lending book currently is around $100 bn.