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The Reserve Bank of India (RBI) is looking to treat online peer-to-peer (P2P) lending platforms as non-banking finance companies (NBFCs) and bring their activities under its purview, it said in a consultation paper. The RBI is looking to regulate the sector with measures including requiring minimum capital of Rs 2 crore or prohibiting them from promising “extraordinary returns.”

A report by Mint points out that there are currently about 30 online (P2P) lending platforms in the country. The RBI also defined P2P lending as a form of crowd funding used to raise unsecured loans which are paid back with interest. It added that it took into consideration Securities Exchange Board of India’s guidelines on crowd funding, but clarified that since P2P lending it is not a transaction where equity or debt is exchanged, it would come under the RBI’s ambit.

Here is a quick lowdown of the consultation paper:

Regulatory framework proposed

Permitted activity:

  • P2P lending platforms will only act as intermediaries between borrowers and lenders.
  • The lending and borrowing activity will not be reflected in balance sheets.
  • The platforms will be prohibited from giving any assured return either directly or indirectly.
  • Platforms will be allowed to opine on the suitability of a lender and creditworthiness of a borrower.
  • Funds will have to move directly from the lender’s bank account to the borrower’s bank account to prevent money laundering.
  • Cross border transactions are not allowed by platforms as they would violate Foreign Exchange Management Act (FEMA) regulations.

Prudential requirements

  • A minimum capital of Rs 2 crore.
  • The RBI may prescribe a leverage ratio later so that the platforms do not expand with indiscriminate leverage.
  • Limits on contributions by a lender to a borrower or segment of activity could also be specified.

Governance requirements

  • The platform will have a CEO, board of directors and promoters and should meet “fit and proper” criteria.
  • Board should have a number of members with background in finance.
  • Platform may need a brick-and-mortar places of business in India. The management and operation personnel will need to be in the country.
  • Platforms will need to submit regular reports on their financial position, loans arranged each quarter, complaints etc. to the RBI.

Why is the RBI is asking P2P lending platforms as NBFCs?

The paper explained that Section 45S of the RBI Act does not allow an individual/ company/an unincorporated association of individuals from accepting deposits other than financial institutions. If the individuals/associations or company’s primary business is accepting deposits by way of lending through a scheme of arrangements, then it is in contravention of Section 45S.  Since a P2P platform will be bringing both borrower and lender together, they will need to register as a financial institution so that they are not in violation of the RBI Act.

How are P2P lending platforms in India working currently? 

– P2P lending platforms are currently registered as technology companies under the Companies Act and act as an aggregator for lenders and borrowers and match them accordingly.

– The companies often follow a reverse auction model in which the lenders bid for a borrower’s loan proposal and the borrower has the freedom to either accept or reject the offer.

– Platforms also provide other services such as credit assessment, recovery, documentation, moderation and meditation between parties.

– They also facilitate collection of post-dated cheques from the borrower in the name of the lender as a proxy for repayment of the loan.

What about KYC?

P2P lending models is primarily from one individual to another. The RBI opined that since all payments are through bank accounts, the KYC exercise can be deemed to have been carried out by the banks concerned. The P2P lending platforms follow soft recovery practices. However, the use of coercive methods cannot be ruled out.

Comments and suggestions need to be sent to the chief general manager, department of  Non-Banking Regulation, Reserve Bank of India before May 31, 2016.

Download: Consultation paper