P2P Lending & Crowd Funding Regulations in India

P2P lending and crowd funding are concepts that are in nascent stage in India with a few online businesses building viable business models and online platforms around the concept. Though P2P lending or crowd funding is yet to gather momentum like payment banks or mobile wallets, the Reserve Bank of India has started analysing the model and has issued a Consultation Paper on Peer to Peer Lending to mitigate risks and regulate the concept. In this article, we look at the present and proposed regulations pertaining to P2P lending and crowd funding in India.

What is P2P Lending?

P2P lending is a form of crowd-funding wherein unsecured loans are issued through an online platform by matching lenders directly with borrowers. The borrower can either be an individual or a legal person requiring a loan. The interest rate may be set by the platform or by mutual agreement between the borrower and the lender. Fees are paid to the platform by both the lender as well as the borrower for successful transactions. The borrowers pay an origination fee (either a flat rate fee or as a percentage of the loan amount raised) according to their risk category. The lenders, depending on the terms of the platform, have to pay an administration fee and an additional fee if they choose to use any additional service (e.g. legal advice etc.), which the platform may provide. The platform provides the service of collecting loan repayments and doing preliminary assessment on the borrower’s creditworthiness. The fees go towards the cost of these services as well as the general business costs. The platforms do the credit scoring and make a profit from arrangement fees and not from the spread between lending and deposit rates as is the case with normal financial intermediation.

What is Crowd Funding?

Crowd funding refers to a method of funding a project or venture through small amounts of money raised from a large number of people, typically through an online portal acting as an intermediary. Some of the major types of crowing funding are:

Equity based Crowd Funding (EbC) – raising equity through a crowd funding platform.
Debt based Crowd Funding (DbC) – raising of funds by issuing debentures or debt securities through a crowd funding platform.
Fund based Crowd Funding (FbC) – raising of funds for pooling under an Alternative Investment Fund (AIF) through a crowd funding platform.

Present P2P Lending Regulations in India

The P2P lending concept is fast growing in India with close to 20 new online P2P lending companies having been launched in the last one year alone. Presently, there are around 30 start-up P2P lending companies operating in India. The present P2P startups and online platforms in India are mostly registered as a private limited company and act as an aggregator for lenders and borrowers. Most platforms on creating a lender or borrower profile on their platform, perform a due diligence and allow participation in lending/borrowing activity. In most cases, the platform moderates the interaction between the borrower and the lender. Some platforms also help with the documentation for the lending and borrowing, once a successful match is made. Since majority of the lending is from one individual to another and done through bank accounts, KYC norms are deemed to have been carried out by the banks concerned.

Proposed P2P Lending Regulations in India

The RBI has proposed to regulate the P2P lending activities in India to support orderly grow and mitigate risk of unhealthy practices being adopted by one or more players. Some of the highlights of the proposed regulations are as follows:

Starting a P2P Lending Platform

RBI has powers to only regulate company and cooperative societies. Thus, P2P platforms operated by individuals, proprietorship, partnership or Limited Liability Partnerships (LLP), would not be permitted as it would not fall under the purview of RBI. Hence, it is essential that all P2P platforms be registered as a private limited company or limited company. Further, it is proposed to bring the P2P lending platforms under the purview of Reserve Bank by defining P2P platforms as NBFCs. Hence, NBFC registration may soon be required for operating a P2P or crowing funding platform. Further, to ensure that there is no indiscriminate starting of P2P platforms, the prudential requirements will include a minimum capital of Rs 2 crore. Further, RBI may also set limits on leverage ratio and maximum contribution by a lender to a borrower/segment of activity. In terms of management and promoters, the RBI would also require fit and proper criteria for promoters, directors and CEO. A reasonable proportion of board members may be required to have financial sector background. Finally, the P2P lender may be mandated to have a brick and mortar place of business in India with the management and operational personnel of the platform - stationed within the country.

Permitted Activities

P2P lending platform would be permitted to act only as an intermediary i.e. the role of the platform would be limited to bringing the borrower and lender together without the lending and borrowing getting reflected on its balance sheet. It would be required for the funds to move from the account of the lender to the borrower’s bank account directly, to obviate the threat of money laundering. Also, transactions between Indian residents and non-residents or NRIs or foreign nationals through the platform would be prohibited to avoid attracting FEMA provisions. Finally, the platform will be prohibited from giving any assured return either directly or indirectly to the lenders.

Operations & Reporting

Transparency in operations, adequate measures for data confidentiality and minimum disclosures to borrowers and lenders would also be mandated for P2P platforms through a fair practices code. For platforms performing the role of a recovery agent for recovery of loans on behalf of lenders would be required to comply with regulations applicable to NBFC with regards to recovery practice. In terms of reporting, P2P platforms will need to submit regular reports on their financial position, loans arranged each quarter, complaints etc. to the Reserve Bank.