The Reserve Bank of India (RBI) has come out with final guidelines for peer-to-peer (P2P) lending platforms. With these guidelines, P2P lending companies will now be regulated as non-banking finance companies (NBFCs) and will come under the purview of the RBI.
In April last year, RBI looking to regulate the sector with measures including requiring minimum capital and prohibiting them from promising “extraordinary returns.”
Here is a lowdown of the regulations:
Registration and eligibility
- Entities undertaking P2p lending should be registered as companies and have to get a cerfticate of registration from the RBI.
- Companies which are engaged in P2P lending will have a net owned fund of not less than Rs 2 crore or such higher amount as the RBI may specify.
- The companies will have to register with the department of Non-banking regulation from the RBI.
- P2P lending companies need to be incorporated in India.
Scope of activities
- NBFC-P2P will act as only as an online intermediary and not raise deposits.
- They will not be permitted to lend from its own books. They will only act as a facilitator between different parties.
- They cannot provide any credit enhancement or credit guarantee.
- No secured lending will be permitted.
- They cannot hold funds received from lenders or borrowers on their own balance sheets.
- They cannot cross-sell other any product except for loan specific insurance products
- P2P lending platforms are not permitted international flow of funds
- They will have to store and process all data relating to its activities and participants on hardware located within India.
- P2P lending platforms will have to undertake due diligence on the participants including credit assessment and risk profiling of the borrowers and disclose the same to their prospective lenders. They will also have to take prior and explicit consent of participants to access their credit information.
- They will have to provide assistance in disbursement and repayments of loan amount and render services for recovery of loans originated on the platform.
- The aggregate exposure of a lender to all borrowers at any point of time, across all P2P platforms, shall be subject to a cap of Rs 10,00,000.
- Similarly, the aggregate loans taken by a borrower at any point of time, across all P2P platforms, will be capped at Rs 10,00,000.
- The exposure of a single lender to the same borrower, across all P2Ps, shall not exceed Rs 50,000.
- The maturity of the loans shall not exceed 36 months.
- P2P lending platforms shall obtain a certificate from the borrower or lender, as applicable, that the limits prescribed above are being adhered to.
- P2P lending platforms should maintain a Leverage Ratio not exceeding 2.
- P2P lending platforms have to set out eligibility criteria for all participants on it. They will also have to set out rules for matching lenders and borrowers in an equitable and non-discriminatory manner. P2P lending companies will also have to determine the pricing of services provided by it.
- These platforms also have to be responsible for actions of providers including recovery agents and confidentiality of information of participants.
- Loans cannot be disbursed until all participants have signed a loan contract.
Fund transfer mechanism
- Fund transfer between participants should be through at least two escrow accounts by a trustee – one for funds received from lenders and pending disbursal, and the other for collections from borrowers.
- The trustee shall mandatorily be promoted by the bank maintaining the escrow accounts.
- All fund transfers shall be through and from bank accounts and cash transaction is strictly prohibited.
Transparency and Disclosure Requirements
- P2P lending platforms should disclose details about the borrowers including personal identity, required amount, interest rate sought and credit score as arrived by the platforms. It should also have details about all the terms and conditions of the loan, including likely return, fees and taxes.
- For borrowers, details about a lenders should be given which includes proposed amount, the interest rate offered. No personal identity should be disclosed but they should have contact details displayed.
- The interest rates displayed on the platform shall be in Annualized Percentage Rate (APR) format.
- On the website, P2P lending platforms have to disclose an overview on its credit assessment and score methodology, grievance redressal mechanism, data usage and protection and an overview of its business model.
- The website will also have to disclose its portfolio performance which includes non-performing assets (NPAs) on a monthly basis and segregate by age.
- P2P lending platforms have to have a Fair Practices Code with the approval of its Board. The same should be put up on its website.
- P2P lending platforms will need to obtain explicit approval from lenders that they have understood the risks associated with the transaction and there is no guarantee of return and there is a likelihood of loss of the entire principal in case of default by a borrower. The platform will not provide assurances for recovery of loans.
- Interestingly the RBI added that they must display a caveat: “Reserve Bank of India does not accept any responsibility for the correctness of any of the statements or representations made or opinions expressed by the NBFC-P2P, and does not provide any assurance for repayment of the loans lent on it”.
- Platforms have to ensure that the staff are adequately trained to deal with the participants in an appropriate manner and shall not resort to harassment viz; persistently bothering the borrowers at odd hours, use of coercion for recovery of loans, etc.
The quarterly statements shall be submitted to the Regional Office within 15 days after the quarter: The statement should include:
- The number and amount in respect of loans
- The number of loans disbursed during the quarter
- Loans closed during the quarter
- The outstanding loans at the beginning and at the end of the quarter including the number of lenders and borrowers.
- The amount of funds held in the Escrow Account, bifurcated into funds received from lenders and funds received from borrowers.
- The Leverage Ratio, with details of its numerator and denominator.
- Number of complaints outstanding at beginning and at end of quarter, and disposed of during the quarter, bifurcated as received from lenders and borrowers.
The guidelines from the RBI norms for disclosures are welcome. The disclosures on how companies are calculating credit scores are welcome to borrowers. Right now, with many companies looking to build credit scores through by looking at cash-flows and information on how the platforms collect this information is crucial. Companies such as EarlySalary are building credit profiles based on information on social media. Meanwhile, there are untested methods which profiles people psychologically on seeing if they are eligible for a loan.
Meanwhile, the requirement that loan information will have to be shared with credit information companies is welcome. First-time borrowers will now be able to get a better credit score and get better loans in the future.
The disclosures on non-performing assets should provide give information to lenders on the performance of portfolios and whether they should use the platform.
The clarity that the funds coming in from lenders and borrowers cannot be on their balance sheets is welcome and the clear definition of maintaining separate escrows for lenders and borrowers is wise and will lead to more robust processes.
However, lending platforms have been complaining that the maintenance of a leverage ratio of 2 does not make sense as they act as intermediaries and they do not hold any debt, as indicated by this Economic Times report. Leverage ratio is a financial measurement that look at how much capital comes in the form of debt (loans) and equity. This might hurt their expansion plans.
The RBI also needs to detail more extensively how platforms or lenders can recover money in case of default. Right now it only says that it can provide services for recovery. How this is achieved is not mentioned.