RBI Guidelines for P2P lending platforms

P2P Lending Platforms will soon go mainstream
In a welcoming move, RBI recently notified Peer-to-Peer (P2P) Lending institutions as Non-Banking Financial Companies (NBFCs). Now it’s only a matter of time before RBI issues guidelines to regulate the sector. In April 2016, RBI had released a consultation paper discussing the possibility of bring the sector under the purview of its regulations along with touching upon the need and scope of the regulation. RBI took the initiative in the wake of P2P Lending industry catching fancy globally and in India as well. By notifying P2P Lending platforms as NBFCs on August 24, 2017, RBI took the discussion to a logical conclusion.

RBI awards NBFC status to P2P Lending Platforms.

What does it mean to investors and borrowers?

As the bank deposits are turning unattractive due to falling interest rates, investors have been exploring better investment opportunities. So far, many of them were sitting on the fence waiting for the sector to come under strict regulations. RBI’s awarding the NBFC status to P2P Lending platforms will address all trust-related concerns of investors. Since P2P Lending platforms open up a window of unsecured credit to borrowers with limited access to formal credit facilities, regulations will act as a confidence booster for them. In quest of better yields, more individual and retail investors may turn to P2P Lending platforms.  Naturally, it’s great news for the honest borrowers.

P2P Lending platforms will have to register themselves with RBI and follow the prudential guidelines as and when issued by RBI.  All existing platforms founded by individuals, partnerships or Limited Liability Partnerships (LLPs) will have to adopt company structure. Else, such structures will have to be governed by the respective state governments. The industry may require more clarity on this aspect.

The proposed guidelines are as follows:

Scope of activities: P2P Lending platforms would be allowed only to act as intermediaries at least for the time being. They won’t be authorised to guarantee any returns to investors. However, they may give their view on the suitability of a particular loan project to a lender and creditworthiness of the borrower.  Cross-border funds won’t be allowed in the wake of FEMA provisions. This means NRIs will have to wait longer before they can invest in P2P Lending projects. The regulator may also consider allowing platforms to maintain nodal accounts for handling funds of its members—without amalgamating them with its own accounts. Clarity is needed on this aspect too.

Capital requirements: Minimum Capital requirement of Rs 2 crore is likely to be prescribed for P2P Lending platforms to ensure they remain committed to the business. Their borrowings may also be capped to ensure there is no instance of unhealthy growth with leveraged balance sheets.

Exposure guidelines for investors: Assuming not all lenders would be well-informed about pros and cons of P2P Lending, the ceiling for individual credit exposures per borrower/segment may also be introduced.

P2P Lending platforms will have to meet a minimum fitness criterion set by RBI which includes having a brick and mortar place of business in India and management based in India. Moreover, the promoters of a P2P Lending platform and a reasonable proportion of board members will have to have experience in the financial sector. And the promoter will have to show a backup plan for the safety of lenders and borrowers of the platform. Since a P2P lending platform acts as a custodian for cheques and agreements of borrowers and lenders, its failure may prove catastrophic for the members of the platform.

Reporting and customer servicing requirements: Since P2P Platforms handle personal and confidential data of members of the platform, data security and maintaining the privacy of records would be the responsibility of the platforms. In case, a platform facilitates the recovery of the loan on behalf of lenders, existing rules applicable to other NBFCs may also apply to a P2P Lending platform. Besides maintaining transparency with members, all platforms will have to establish a grievance redressal department for their benefit. The board will have to be reported on grievances.

On the whole, the stage is set for the massive growth of the industry. The road ahead is exciting but also full of challenges.  Along with getting quality borrowers aboard, ensuring data security is a tough task. Only serious players may come through with flying colours.