P2P Companies are basically online portals that aid the borrowers and lenders coming together without any need of an intermediary. P2P companies are registered under the Companies Act, 2013.
For any Company that desires to run the business of P2P Lending needs to obtain Peer to Peer lending License from Reserve Bank of India by making an Application and submitting the relevant documents, as required.>
What is Peer to Peer Lending?
Peer to Peer Lending is a procedure of lending an amount of money to people or business houses via online services that help match the lenders with the borrowers. P2P lending is mostly done online.
Peer to Peer Lending is a way of debt financing which allows individuals to lend and borrow money without the participation of a financial institution as an intermediary. P2P Lending eliminates the intermediary from the process. Hence, both the borrower and the lender save on the charges that are charged by the intermediary. Reserve Bank of India regulates the Peer to Peer Lending in India.
Peer to Peer Lending is becoming increasingly popular as both the lender as well as the borrower gets an option to choose from an array of options pertaining to rate of interest and loan amount respectively. Both are free to choose the party where they benefit the most.
Key Characteristics of Peer to Peer Lending Portals
These are the online portals that match the borrowers with the lenders.
There is no requirement of a prior relationship between the borrower and the lender.
There is no involvement of a financial institution acting as an intermediary between the borrower and the lender.
The lender and the borrowers are free to make their choice of investment and borrowing respectively.
How does Peer to Peer Lending work?
The particular party- borrower or the lender gets registered with the online Peer to Peer lending portal by submitting the information asked by the Peer to Peer lending Company.
Post Registration, Due Diligence of the individual is conducted by the Peer to Peer lending.
Parties who have a positive report post the process of Due Diligence which gets an approval to create their profile on the portal. In this manner, they can reach to other parties, interact with them and make the loan deal as per mutual agreement.
The loans can be secured or unsecured and mostly do not come under the protection of government insurance.
Some Peer to Peer Lending platforms can provide the facility of loan transfer like securities for the purpose of profit or debt collection.
What is eligibility Criteria to run Peer to Peer Lending Business?
Peer to Peer Lending business can be run only by Registered Companies or NBFCs in India.
Any Company that wishes to have the Certificate of Registration for Peer to Peer Lending business must have the Net worth of INR 2 crores.
In case a Company was already running such business before COR was made mandatory, then such Company shall fulfill all the conditions, as laid down by RBI.
Conditions to obtain Peer to Peer Lending License
Reserve Bank of India requires the following conditions to be fulfilled by a Company for Registration as a Peer to Peer Lending Company:
It should be incorporated in India.
It should have all the essential entrepreneurial, managerial and technological resources to offer the Peer to Peer lending services to the participants.
It should have the suitable capital structure to run a Peer to Peer Lending platform.
Its Directors and Promoters should be proper and fit.
The general character of the management of the Company should not be detrimental to public interest.
It should submit a plan for implementation of a secure Information Technology System; if the same has not been implemented already.
It has submitted a feasible business plan to run Peer to Peer Lending portal.
If the Company is granted the Certificate of Registration, public interest would be served.
Any other such condition, as may be notified from time to time by RBI, which ensures that starting or running of such business in India is not detrimental to the public interest.
For new Companies:
If a new Company seeks CoR and fulfills all the conditions mentioned above, RBI can grant it in-principle approval to set up a Peer to Peer Lending platform, upon fulfillment of such other condition as the RBI may deem fit.
The in-principle approval stands valid for a period of twelve months from the date which is granted to it.
In the period of twelve months, the Company shall be required to set-up its technology platform, perform all the legal documentations required and report all the compliances that were required to be made to RBI.
If RBI is satisfied that the Company is ready to commence the operations of Peer to Peer Lending, it can grant the Certificate of Registration, subject to fulfillment of such conditions, as it may deem fit.
What is the Scope of Activities of Peer to Peer Lending Platforms?
Peer to Peer Lending Companies can undertake the following activities:
Provide an online platform to the participants involved in Peer to Peer Lending, thereby acting as their intermediary.
They cannot raise deposits under Companies Act, 2013 or under Section 45I(bb) of RBI Act.
They cannot lend on their own.
They cannot provide or arrange any credit guarantee or credit enhancement.
They cannot facilitate or allow any secured lending that is linked to their online platform. Permission has only been given for clean loans.
They cannot hold the funds that are received from the lenders (for lending) or from the borrowers (for servicing loans) in their own balance sheet.
The Companies are not allowed to sell any product except the loan specific insurance products.
They are not permitted international flow of funds.
The Companies are required to comply with all the legal requirements that are applicable to the involved participants under the relevant applicable laws.
It is mandatory for the Companies to store and process the entire data related to its activities and participants on hardware that is located within India.
Responsibilities of P2P Lending Companies towards the participants
The Peer to Peer Companies have the following responsibilities towards its participants:
Undertaking due diligence on its participants prior to approving them as participants on the platform;
Undertaking the risk profiling and credit assessment of the registered borrowers and disclosing the same to the registered lenders;
Requiring explicit and prior consent of the participants to access its credit information;
Undertaking documentation of the loan agreements and other relevant documents;
Providing assistance in repayments and disbursement of the loan amount;
Rendering services pertaining to the loan recovery for the loans that originated on the platform.
Funds Transfer Mechanism on Peer to Peer Lending Platforms
On Peer to Peer Lending platforms, the funds shall be transferred between the participants via Escrow account mechanism, which shall be operated by a Trustee.
Minimum two Escrow accounts are required to be maintained- one for receiving an amount from the lenders where disbursal is pending and the other for borrowers.
All the transactions will be made only via bank accounts. Cash transactions are completely prohibited.
Submission of Data to CICs by the Peer to Peer Lending Companies
Peer to Peer Lending Companies are mandatorily required to become members of the Credit Information Companies and submit the relevant data to them. This includes:
It keeps the credit information of the borrowers and the lenders well-maintained and update the same on such intervals, as decided between the Company and the CIC;
Necessary measures that may be required to ensure the credit information provided by it is up to date, precise and complete;
For the agreements with the participants, it shall include the relevant consent to provide the credit information.
Transparency and Disclosure Requirements of P2P Lending Business
A Peer to Peer Lending Company shall be required to disclose the following to the lender:
The details pertaining to the borrower’s personal identity, rate of an interest sought, loan amount required and the credit score.
The details pertaining to the terms and conditions related to the loan such as return, taxes and the fees.
The following disclosures are to be made to the borrower:
The details pertaining to the amount proposed by the lender and the rate of interest offered.
It is not mandatory to disclose the personal identity and the contact details of the lender to the borrower. The following details shall be disclosed on the website of the Company publicly:
Grievance Redressal Method
Elaborate Business Model
Portfolio Performance on a monthly basis, which includes details of non-performing assets
Disclosures on usage and protection of user data
Outline of credit assessment and factors considered for the same
Grievance Redressal of the Participants
A Peer to Peer Lending Company shall be required to put in place; a policy approved by the Board to address the complaints of the participants. These complaints shall be handled in the manner provided in the Board approved policy but shall not be dealt with beyond the period of one month of the receipt of the complaint.
For the benefit of the participants, the following information shall be permanently displayed by the Company on its website:
The Grievance Redressal Officer’s name and contact details. The participants can approach this Officer for the complaints against the Company.
It shall also be displayed that if the complaints of the participants are not addressed within one month, they may appeal to Customer Education and Protection Department of RBI.
