The global outlook of financial products and services is increasingly getting automated, integrated and encrypted in digital formats. P2P platforms such as Monexo, have emerged as facilitators connecting borrowers to lenders & investors. Monexo is amongst the pioneering institutions in this ground-breaking financial model as it eliminates the traditional approach to lending credit.
In the event of any innovation, there lies the need to necessitate specific and standardized regulations. In India, the Reserve Bank is bestowed with the powers to design, delegate and drive the regulatory framework. As the central bank, RBI acts has recognized the potential benefits and inherent risks of P2P lending, stepping in with regulations to safeguard the system and ensure its healthy evolution.
Need for RBI Intervention
In the financial world, our services are to be taken with utmost regard as they translated into the financial health of an individual at a microeconomic level & the financial health of the country at a macroeconomic level.
The newest product in the market is the Peer-to-peer lending platform. Disguised in the technical financial jargon, customers bear invisible costs with ambiguous and minimal understanding of the financial product. Without regulation, the P2P lending market could become prone to high default rates and the loss of public trust in this innovative market.
The newest product in the market is the Peer-to-peer lending platform. Disguised in the technical financial jargon, customers bear invisible costs with ambiguous and minimal understanding of the financial product. Without regulation, the P2P lending market could become prone to high default rates and the loss of public trust in this innovative market
Participants in a P2P Model:
As per the Para 4(1)(iv) of the directions, “Participant” means a person who has entered into an arrangement with an NBFC-P2P to lend on it or to avail of loan facilitation services provided by it. Any individual, body of individuals, HUF, firm, society, or any artificial body, whether incorporated or not can lend or borrow on the P2P platform.
Read: Partners of Monexo
Eligibility for a NBFC – P2P Registration:
The regulatory guidelines delineate the following prerequisites for entities seeking registration as an NBFC-P2P:
Only entities recognized as Non-Banking Financial Companies (NBFCs) are permitted to engage in the P2P lending business. Any NBFC, whether intending to initiate or currently engaged in operating a P2P lending platform, must secure a Certificate of Registration (CoR) from the Reserve Bank of India (RBI).
An NBFC-P2P is required to maintain a Net Owned Fund (NOF) of no less than Rs. 2 crores to be eligible for registration with the RBI. The requisite capital must be infused prior to the issuance of the Certificate of Registration, rather than at the time of application submission. At the application stage, it is mandatory to disclose only the list of promoters and the sources of the aforementioned capital.
Criteria for Qualification of Participants in Peer-to-Peer Lending Platforms
Q. What qualification criteria exist for entities seeking to register as lenders on Peer-to-Peer (P2P) Lending Platforms?
In India, entities looking to register as lenders on Peer-to-Peer (P2P) Lending Platforms must meet specific criteria as prescribed by the Reserve Bank of India (RBI). Here are the key qualification criteria:
Entity Type:
Only companies can undertake the business of a P2P lending platform. Non-banking institutions other than companies are not eligible.
Certificate of Registration (CoR):
Entities must obtain a CoR from the RBI before they can commence or continue operating as a P2P lending platform. Existing entities engaged in such businesses at the time of the regulation announcement must apply for a CoR and can continue operations conditionally until their application is processed.
Net Owned Funds:
Entities must have a minimum net owned fund of at least Rs. 2 crores
Application Process:
Entities must apply for registration through the RBI’s Department of Regulation in Mumbai, using a specific form provided by the RBI.
Operational Requirements: In order to qualify, an entity must be:
- Incorporated in India.
- Possess necessary technological, entrepreneurial, and managerial resources.
- Have an adequate capital structure.
- Ensure that promoters and directors are fit and proper.
- Not engage in activities prejudicial to the public interest.
- Implement a robust and secure IT system.
- Submit a viable business plan for operating a P2P lending platform.
In-Principle Approval:
The RBI may issue in-principle approval for new platforms, valid for twelve months, during which the company must meet specified conditions before receiving the CoR.
Prohibition on International Fund Flows:
Entities are not allowed to facilitate or permit international flow of funds in relation to P2P transactions.
Comply with Regulations :
Entities must also comply with requirements related to the assessment of borrowers, documentation of loan agreements, and the assistance in loan disbursement and recovery, all while ensuring the confidentiality and integrity of participant information.
Q. What is the qualification criteria for individuals or entities seeking to register as borrowers on the P2P Lending Platform?
Here are the key points summarizing the qualification criteria for individuals or entities looking to register as borrowers on a P2P lending platform:
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- Registration Process: Borrowers must register on a P2P lending platform by providing necessary information requested by the P2P lending company.
- Due Diligence: The platform performs a due diligence process, and those who pass can create a profile on the portal.
- Profile Activation: After approval in the due diligence, borrowers can set up their main profile to contact lenders and negotiate loans.
- Regulation Compliance: Platforms are regulated by the RBI and must have NBFC-P2P certification before starting operations.
- Open to Various Participants: RBI guidelines permit individuals, HUFs, firms, societies, and companies to participate.
- Investment Limit: The RBI has increased the investment limit for individuals to Rs 50 lakhs.
- KYC Requirements: Registration requires KYC details like a government-issued ID card, credit score, and address.
Q. Is the opportunity to register as a lender on the platform available to any interested party?
Registration as a lender on P2P lending platforms is accessible to any legal entity that meets the policy criteria set forth by the platform. Such policies are autonomously established by each platform and endorsed by their governing board, outlining the eligibility conditions for prospective participants.
It is imperative to note that the RBI does not prescribe any specific eligibility criteria for participants. Nevertheless, compliance with all pertinent legal stipulations, including the prohibition of international capital flows, is imperative.
Is registration as a borrower on the platform open to all?
Only companies can undertake the business of a P2P lending platform. Non-bThe eligibility to register as a borrower is aligned with the same principles applicable to lenders, as stated above.
Guidelines on Lending and Borrowing Constraints
Lending Restrictions for a P2P platform:
According to the RBI’s Prudential Norms, specifically sections 2 and 4, a lender is capped at lending an aggregate amount of Rs. 10,00,000 to borrowers on all P2P platforms. Additionally, the lender is restricted from lending over Rs. 50,000 to any individual borrower across these platforms.
Borrowing Restrictions for a P2P platform:
Pursuant to section 3 of the RBI’s Prudential Norms, a borrower is limited to obtaining loans totaling no more than Rs. 10 lacs across all P2P platforms. Moreover, the borrower is not permitted to borrow in excess of Rs. 50,000 from a single lender across all platforms.
Responsibilities of the Participant:
P2P platforms are prohibited from loan disbursements unless the lenders individually sanction the borrowers and the respective participants have entered into a loan agreement.
According to the Fair Practice Code, the NBFC-P2P must acquire a clear acknowledgment from the lender that they understand the inherent transactional risks, acknowledge that returns are not guaranteed, accept the potential loss of the principal if the borrower defaults, and recognize that the platform does not assure loan recovery.
Scope of Operation:
A P2P platform can perform the following:
a. Facilitate the disbursement of unsecured loans exclusively.
b. The platform is limited to selling only insurance products that are directly associated with the loans offered.
c. P2P lending platforms are prohibited from engaging in or facilitating any form of credit enhancement or guarantee, effectively precluding the development of innovative financial products aimed at protecting the capital of lenders.
d. As stated in thePrudential Norms of the RBI, detailed under sub-part 5, the duration of any loan issued via a P2P platform must not surpass a term of 36 months.
e. Given that the face of the loan origination for the borrower is theP2P platform, and considering that the platform is categorized as an NBFC-P2P, there is no contravention of regulatory stipulations. The obscured identity of the actual lender from the borrower ensures that the funds provided cannot be considered deposits. Consequently, it is our interpretation that loans procured by corporate entities through the platform should not be classified as deposits due to this one-directional anonymity.
H3: RBI’s Directions for Operational Guidelines
i. Any functions outsourced by the platform, as well as the conduct of service providers, including recovery agents, fall under the platform’s purview of liability.
ii. The platform bears the responsibility for safeguarding the confidentiality of participant information in the custody of its service providers.
iii. In accordance with the Fair Practices Code, the platform must conspicuously display a disclaimer stating, “The Reserve Bank of India does not endorse the accuracy of any statements or claims made, or opinions voiced by the NBFC-P2P, nor does it guarantee the repayment of loans facilitated by it”.
At Monexo, we diligently ensure that all practices remain ethical, transparent and trustworthy.
Read more: Monexo Fair policy code
Management of Escrow Accounts and Execution of Fund Transfers
Which entity is responsible for selecting the trustee?
a. P2P platforms must maintain escrow accounts operated by bank-promoted trustees.
b. The trustee is tasked with instructing the bank and directly managing the escrow account operations in accordance with directives from the lenders, borrowers, or the platform acting on their behalf.
c. As per the RBI’s guidance in Paragraph 9, only electronic bank transfers are permissible, and cash transactions are expressly forbidden.
Data Reporting by NBFC-P2P to Credit Information Companies (CICs)
NBFC-P2P is mandated to join all CICs and report all data, including past data. The initiative aims to lower default rates and enhance the system’s credibility. In today’s world where decisions depend on data, precise and up-to-date credit information is essential for sound financial judgments.
Conclusion:
Reserve Bank of India’s regulatory framework for Peer-to-Peer (P2P) lending is a cornerstone of this innovative financial service. At Monexo, we welcome these guidelines, recognizing them as a leap forward towards a more secure, transparent, and efficient lending environment. We remain committed to adhering to these standards, upholding the trust of our participants, and continuing to drive financial inclusion and innovation.
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