Peer-to-peer lending platforms will now be treated as non-banking financial companies (NBFC). The Reserve Bank of India (RBI) said that:

On being satisfied that it is necessary to do so, in exercise of the powers conferred on it by sub-clause (iii) of clause (f) of section 45-I of the Reserve Bank of India Act, 1934 (2 of 1934) with the prior approval of the Central Government, hereby, specifies a non-banking institution that carries on ‘the business of a peer to peer lending platform’ to be a Non-Banking Financial Company.

RBI has further defined what it means by P2P lending:

The term “the business of a peer to peer lending platform” shall mean the business of providing under a contract, the service of loan facilitation, via online medium or otherwise, to the participants who have entered into an arrangement with that platform to lend on it or to avail of loan facilitation services provided by it.

However, the notification doesn’t mention when a detailed set of rules and regulations for P2P lending platforms will be released.

Earlier, in April last year, RBI had brought out a consultation paper to determine if P2P lending platforms should be treated as NBFCs. The banking regulator was looking to regulate the sector with measures including requiring minimum capital of Rs 2 crore or prohibiting them from promising “extraordinary returns.”

Interestingly, RBI considers P2P lending as a form of crowd funding used to raise unsecured loans which are paid back with interest. In fact, at the time of issuing the consultation paper it had taken into consideration Securities Exchange Board of India’s guidelines on crowd funding, but had clarified that since P2P lending it is not a transaction where equity or debt is exchanged, it would come under the RBI’s ambit.

Why was this required?

The reason this re-classification was necessitated is because Section 45S of the RBI Act does not allow an individual/companies/an unincorporated association of individuals from accepting deposits from entities other than financial institutions. If the individuals/companies/association’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 lending platform brings both borrower and lender together, it needs to register as a financial institution in order to not be in violation of the RBI Act.

Also Read: Why online peer-to-peer (P2P) lending should not be regulated