Impact of RBI guidelines on P2P lending platforms
RBI Guidelines on P2P Lending Platforms
RBI Guidelines on P2P Lending platforms for regulating P2P Lending sector is nothing less than a watershed moment for the industry. Back in April,2016, RBI had released a consultation paper discussing the various aspects of the peer to peer lending industry. In that consultation paper, itself, the apex body had hinted at the possibility of bringing the P2P lending sector under its regulation. Recently, on August 24, RBI had notified P2P lending platforms as NBFCs.The entire industry was waiting with bated breath for the publication of the final guidelines. Finally, on 4th October 2017, RBI has released the Master Directions (Master Direction DNBR (PD) 090/ 03.10.124/ 2017-18) governing the P2P lending industry.
Going forward, the RBI Guidelines on P2P Lending will have serious implications on the industry. The recently published guidelines will impact the industry on the following counts:
- Investor Protection
- Effective Grievance Redressal
- Information Security
Transparency: As a result of the new norms, more transparency will be injected into the P2P lending sector. Undoubtedly, the new norms will make it difficult for fly-by-night operators to swindle investors. However, the more serious players are likely to benefit from the regulations.
RBI, in its note, lays emphasis on the CoR (Certificate of Registration) which will be awarded after rigorous scrutiny of the company’s credentials and can be even withdrawn if any of the clauses are violated. One of the key highlights of the RBI’s guidelines is the fact that any company seeking registration with the Bank as NBFC-P2P shall have net owned fund of not less than rupees twenty million or higher amount as specified by the Bank. This would ensure that only serious players with deep pockets could enter the playing turf.
The RBI Guidelines on P2P Lending mandate that any NBFC-P2P must reveal the following crucial pieces of information to the lenders:
- details about the borrower/s including personal identity, required amount, interest rate sought and credit score as arrived by the NBFC-P2P.
- details about all the terms and conditions of the loan, including likely return, fees and taxes.
On the other hand, the borrowers need to be informed of the following:
- details about the lender/s including proposed amount, interest rate offered but excluding personal identity and contact details
Even on the website, the visitors should be apprised of important facts like the overview of the credit assessment methodology, disclosures on data protection and broad business model.
Accountability: The RBI Guidelines on P2P Lending will go a long way in fixing accountability with the P2P Lending sites. The guidelines mandate that the NBFC P2Ps will have to discharge the following responsibilities:
- Undertake credit assessment and risk profiling of borrowers. Moreover, the same should be disclosed to the investor as well
- Undertake documentation of loan agreements and other relevant documents.
- Provide assistance in disbursement and repayments of loan amount.
- Render recovery services for loans originated on the platform.
Additionally, under the operational guidelines, the new norms state that the NBFC P2Ps will have board approved policy in place to take care of the following:
- Setting out the eligibility criteria for the various stakeholders
- Deciding on the prices of the services rendered by it
- Clearly fleshing out the rules for matching lenders to borrowers in a non-discriminatory manner.
Most importantly, the RBI Guidelines on P2P Lending unequivocally mention that outsourcing of any activity by the P2P site will not diminish its responsibility. Thus, under the new operating conditions, the responsibility stops at the doorstep of the peer to peer lending platforms. Undoubtedly, it would make life difficult for the non-serious players who have got into the game without any long-term commitment.
Confidence: The RBI Guidelines on P2P Lending will definitely introduce a degree of confidence in the mind of the general public about the P2P Lending landscape especially when it comes to management, acquisition or transfer of control of NBFC-P2Ps.
The norms mandate that prior written permission is required from RBI under the following circumstances:
- Any allotment of shares that will take the aggregate holding of an individual or group to equivalent of 26 percent and more of total paid-up capital of the NBFC P2P.
- Any take-over or acquisition of control of an NBFC-P2P, which may or may not result in change of management
- Any change in the management of the NBFC-P2P which would result in change in more than 30 per cent of the directors, excluding independent directors.
- Any change in shareholding that will give the acquirer a right to nominate a Director.
The RBI Guidelines on P2P Lending even throw light on the accepted mode of fund transfer between participants to boost confidence in the process. The new norms stipulate that fund transfer should be via escrow account mechanism which will be operated by a trustee. Two escrow accounts are required; one for funds received from lenders and pending disbursal, and the other for collections from borrowers, shall be maintained. Cash transactions of any sort has been strictly prohibited. It’s worth noting that I2I Funding had adopted the escrow account mechanism for fund transfer well in advance.
In a bid to further enrich the Peer-to-Peer lending ecosystem, RBI has stipulated that every NBFC-P2P will have to become member of all the CICs (Credit Information Companies). A free flow of information about borrower profiles will help to bring down the instances of borrower default in the coming days.
Investor Protection: The RBI Guidelines on P2P Lending could very well be the game changer in this regard. A lot of P2P Lending platforms have mushroomed in the country over the last few years. Many of these platforms have hardly any safeguard in place to secure investor wealth. In this regard, it’s worth noting that I2I Funding was the first P2P Platform to introduce Principal Protection Plan with the investor interest in mind.
The notable highlights of the RBI guidelines pertaining to investor wealth protection are:
- At a given point of time, the overall amount lent out by an investor to all the borrowers shouldn’t exceed ten lakh rupees (10,00,000 INR)
- At a given instance of time, the total amount lent out by an investor to a single borrower shouldn’t cross the limit of fifty thousand rupees (50,000 INR)
- An upper limit of 36 months has been imposed on the maturity period of the loans
The above clauses are mostly cautionary in nature and expected to get relaxation in future as this industry matures. The clause that imposes a restriction on the maximum amount that an investor can lend to a single borrower will undoubtedly reduce the financial risk involved in a loan-default scenario. An age-old adage says that “Don’t put all your eggs in the same basket”. While some prudent P2P lending sites like the I2I Funding had a self-imposed restriction on the maximum amount that an investor can lend out to a single borrower, the general scenario was not very encouraging. Several platforms would allow investors to invest as much as possible in a single borrower, thereby exposing the hapless investors to tremendous financial risk. With the recent guidelines in place, the scenario is likely to improve.
The RBI Guidelines on P2P Lending attempts to empower the investors by unambiguously stating that no loan should be disbursed until the individual lender/s have approved the individual recipient/s of the loan and all concerned participants have signed the loan contract.
Effective Grievance Redressal: One of the key highlights of the RBI Guidelines on P2P Lending is its emphasis on timely and effective grievance redressal. As per the new guidelines, every NBFC-P2P has to put in place a Board approved policy to address participant complaints. The rules mandate that such complaints should be disposed in a time frame not exceeding one month.
Peer to Peer Lending sites need to prominently display the contact details of the Grievance Redressal Officer on their websites who could be approached in case of any issues. In case, the concerned P2P Lending site fails to act within the stipulated period of one month, the aggrieved customer can approach Customer Education and Protection Department of RBI.
Information Security: In light of the recent Supreme Court verdict wherein it upheld that right to privacy is a fundamental right, information security has acquired great importance.
In this regard, the norms mandate that the business of an NBFC-P2P shall be primarily Information Technology driven with regular information system audits in place. More importantly, the technology should be scalable to cope with a changing volume of the business. The norms further stipulate that adequate safeguards are put in place to ensure that IT system is protected against unauthorized access, alteration, destruction, disclosure or dissemination of records and data. Moreover, a Board Approved Business Continuity Plan should be put in place for safekeeping of information and documents and servicing of loans for full tenure in case of closure of platform.
On the whole, it can be commented that the RBI Guidelines on P2P Lending is a step in the right direction. The guidelines attempt to address a number of pain-points that both investors as well as borrowers have complained for long. Going forward, if these guidelines are implemented in the right spirit, the Indian P2P Lending industry will undoubtedly be benefited. The non-serious players who have entered the field to make some quick bucks will definitely be hurt whereas the more committed P2P Lending sites like www.i2ifunding.com will enjoy the fruits of the RBI’s initiative.