NBFC – Peer to Peer Lending Platform (Reserve Bank) Directions, 2017

The Reserve Bank of India (RBI) on 04th October 2017 had come out with a Master Directions for the peer-to-peer (P2P) lending marketplace that until so far remained without any regulations.
The P2P lending market place can in other way be described as a crowd funded loan raising mechanism driven by technology that matches prospective borrowers and lenders on a single platform via Internet. The entities engaged in the business of P2P lending, are primarily technology entities, which means they do not use their own funds to lend. These technology companies operate as marketplaces to facilitate loans between lenders and borrowers. Their principal business is to provide their platform as marketplaces and their primary source of income is the platform/technology fee.
The Directions notified by the RBI provides a framework for the registration and operation of NBFC-P2Ps in India. The existing P2P lending organizations will have to now comply with RBI’s compliance norms like minimum capital of Rs 2 crore, meeting fit-and-proper criteria, submitting regulator reports with RBI etc.

Eligibility criteria – Registration Under RBI:

Only a company shall undertake the business of Peer to Peer Lending Platform.

Shall obtain a Certificate of Registration (CoR) from the RBI. Provided that an entity carrying on the business of a Peer-to-Peer Lending Platform as on the effective date of these directions, can continue to do so, subject to the conditions laid down in sub-paragraph (2)(vii) in this Paragraph.

Every company seeking registration with the Bank as an NBFC-P2P shall have a net owned fund of not less than rupees twenty million or such higher amount as the RBI may specify.

Existing NBFC-P2P:

1. Apply within 3 months from the Direction
2. The company shall be incorporated in India and to satisfy other conditions as stipulated by the RBI
3. Can continue the P2P business until the application is rejected.

Prospective NBFC-P2P:

1. Apply after fulfilling the conditions stipulated by the RBI
2. RBI will grant in-principal approval for setting up P2P lending platform.
3. Validity of the in-principal approval will be 12 months from the date of granting the approval
4. RBI, after satisfaction of the conditions, grant CoR

Conditions to be satisfied for granting CoR:

1. The company is incorporated in India;
2. The company has the necessary technological, entrepreneurial and managerial resources to offer such services to the participants;
3. The company has the adequate capital structure to undertake the business of Peer to Peer Lending Platform;
4. The promoters and the Directors of the company are fit and proper;
5. The general character of the management of the company is not prejudicial to the public interest;
6. The company has submitted a plan for, or implemented, a robust and secure Information Technology system;
7. The company has submitted a viable business plan for conducting the business of Peer to Peer Lending Platform;
8. Public interest shall be served by the grant of CoR;

Any other condition as may be specified by the Bank, fulfillment of which, in the opinion of the Bank, is necessary to ensure that the commencement of or carrying on the business in India shall not be prejudicial to the public interest.

SCOPE OF ACTIVITIES:

1. Act as an intermediary providing an online marketplace
2. Not raise deposits as defined by or under section 45i(bb) of the act or the companies act, 2013
3. Not lend on its own
4. Not provide or arrange any credit enhancement or credit guarantee
5. Not facilitate or permit any secured lending linked to its platform; i.e. Only clean loans will be permitted
6. Not hold, on its own balance sheet, funds received from lenders for lending, or funds received from borrowers for servicing loans; or such funds as stipulated in paragraph 9
7. Not cross sell any product except for loan specific insurance products
8. Not permit international flow of funds;
9. Ensure adherence to legal requirements applicable to the participants as prescribed under relevant laws
10. Store and process all data relating to its activities and participants on hardware located within india
11. Undertake due diligence on the participants
12. Undertake credit assessment and risk profiling of the borrowers and disclose the same to their prospective lenders
13. Require prior and explicit consent of the participant to access its credit information
14. Undertake documentation of loan agreements and other related documents
15. Provide assistance in disbursement and repayments of loan amount
16. Render services for recovery of loans originated on the platform

PRUDENTIAL NORMS TO BE FOLLOWED BY NBFC-P2P:

1. NBFC-P2P shall maintain a Leverage Ratio not exceeding
2. The aggregate exposure of a lender to all borrowers at any point of time, across all
   P2Ps, shall be subject to a cap of Rs. 10,00,000/-.
3. The aggregate loans taken by a borrower at any point of time, across all P2Ps, shall be subject to a cap of
   Rs. 10,00,000/-.
4. The exposure of a single lender to the same borrower, across all P2Ps, shall not
   exceed Rs. 50,000/-.
5. The maturity of the loans shall not exceed 36 months.
6. P2Ps shall obtain a certificate from the borrower or lender, as applicable, that the
   limits prescribed above are being adhered to.

OTHER CONDITIONS:

The RBI Directions have stipulated various conditions like;

1. Fund transfer between participants shall be through escrow account mechanism, operated by a trustee. The mechanism may be as Annex 1
2. NBFC-P2P shall become member of all Credit Information Companies and submit data to them, including historical
3. There shall be transparent disclosure to the lender about details of borrower and vice versa
4. Shall disclose on its website the following;(a) overview of credit assessment/score methodology and factors considered;
   (b) disclosures on usage/protection of data;
   (c) grievance redressal mechanism;
   (d) portfolio performance including share of non-performing assets on a monthly basis and segregation by age; and
   (e) its broad business model.
5. Interest rates displayed on the platform shall be in Annualized Percentage Rate (APR) format
   The Board of Directors to adopt/ approve;(a) policy on P2P lending
   (b) Fair Practice Code on the guidelines outlined by the RBI
   (c) a policy on participant grievance redressal.
   (d) Business Continuity Plan in place for safekeeping of information and documents and servicing of loans for full tenure in case of closure of platform.
   (e) Policy on ‘Fit and Proper’ criteria to be met by its directors in consistent with the guidelines outlined by the RBI
6. Information System Audit of the internal systems and processes shall be in place and shall be conducted at least once in two years by CISA certified external auditors
7. Obtain prior approval of the RBI for allotment of shares (if aggregate holding of an individual or group will be 26% or more of the paid up capital), acquisition or transfer of control, including progressive increase
8. Issue a public notice of at least 30 days about the change in management / control

REPORTING REQUIREMENTS:

1. Communicate, not later than one month from the occurrence with respect to change of address, directors, auditors, etc
2. Within 15 days from end of a quarter, a statement showing the number and amount in respect of loans,
3. Within 15 days from end of a quarter amount of funds held in the Escrow Account
4. Within 15 days from end of a quarter number of complaints received and disposed (for both borrowers and lenders)
5. Within 15 days from end of a quarter, the leverage ratio