RBI’s Directive on P2P Lending

RBI’s Directive on P2P Lending

Sub: Eco

Sec: Monetary policy

RBI’s Directive on P2P Lending:

• The Reserve Bank of India (RBI) has issued a warning to Non-Banking Financial Company – Peer-to-Peer (NBFC-P2P) lending platforms, stating they cannot promote P2P lending as an investment product with features like tenure-linked assured minimum returns and liquidity options.

Prohibition on Fund Utilization:

• NBFC-P2P platforms are not allowed to use a lender’s funds to replace the funds of other lender(s).

Regulatory Violations:

• Some platforms have been found violating the 2017 Master Directions issued by the RBI for NBFC-P2P lending platforms by:
  • Promoting P2P lending as an investment product.
  • Violating the prescribed funds transfer mechanism.
  • Acting as deposit takers or lenders, rather than just a platform.
• Pricing Policy Requirements:
  • The pricing policy for NBFC-P2P platforms must be objective. Fees must be disclosed upfront (ab initio) at the time of lending.
  • Fees should be a fixed amount or a fixed proportion of the principal amount and not dependent on the borrower’s repayment.
  • Matching or mapping participants within a closed user group, whether sourced through an outsourced agency or otherwise, is not allowed. Examples include borrowers or lenders sourced through an affiliate/service provider to the NBFC-P2P.
  • Lenders must bear the entire loss of principal or interest (or both) in respect of funds lent on the platform, and this must be disclosed to lenders as part of the fair practices code.
• Restrictions on Cross-Selling:
  • NBFC-P2P platforms can only cross-sell loan-specific insurance products. They cannot sell insurance products that provide credit enhancement or credit guarantee.
• Cap on Lender Exposure:
  • A lender’s aggregate exposure across all P2P platforms is capped at ₹50 lakh.
  • If a lender’s exposure exceeds ₹10 lakh, they must produce a certificate from a practicing Chartered Accountant certifying a minimum net worth of ₹50 lakh.
• Branding and Transparency:
  • NBFC-P2P lending platforms must clearly display their name (as per the Certificate of Registration) along with their brand name, if any, across all customer interfaces, promotional materials, and communications with stakeholders.

Peer-to-Peer (P2P) Lending

Peer-to-Peer (P2P) Lending is a form of financial technology (fintech) that allows individuals to lend and borrow money directly from one another without the involvement of traditional financial institutions like banks.

• In 2017, the Reserve Bank of India brought this service under its regulatory purview.
• Only an NBFC can register as a P2P lender with the permission of RBI.
• Every P2P lender should obtain a certificate of registration from the RBI.
• The minimum capital requirement to set up a P2P platform is fixed at Rs. 2 Crores.

How P2P Lending Works:

• Platform Role: P2P lending platforms operate as intermediaries, connecting borrowers with lenders. These platforms assess the creditworthiness of borrowers, set interest rates, and facilitate the loan transactions.
• Borrowers: Individuals or small businesses can apply for loans on these platforms. The loans can be used for various purposes such as personal loans, business loans, debt consolidation, or even real estate.
• Lenders: Individuals or institutional investors can lend money to borrowers in exchange for interest payments. Lenders can often choose specific borrowers or diversify their investments across multiple loans to reduce risk.