RESERVE BANK OF INDIA REGULATES PEER TO PEER LENDING
The Reserve Bank of India (RBI) recently issued a Master Direction on Peer to Peer Lending Platform for the registration and operation of peer to peer lending, pursuant to the Notification issued by RBI dated 24 August 2017 in which it specified that only a Non Banking Financial Company (NBFC) can carry on the business of providing a peer to peer lending platform.
Peer to Peer Lending Platform means an intermediary providing the services of loan facilitation via online medium or otherwise by linking lenders with borrowers in order to provide unsecured loans at a rate of interest which may be fixed by the platform or mutually agreed between the lender and borrower.
In this update we have broadly captured the directions which are provided in the Master Direction and the Notification:
Registration:
Every prospective Peer to Peer NBFC must make an application for Certificate of Registration to the RBI for carrying on the business of a peer to peer lending platform, based on certain criteria laid down by RBI which must be fulfilled such as adequate capital structure, company incorporated in India, public interest etc. Existing Peer to Peer NBFCs’ must apply for registration within 3 months from the date of the Master Direction. Any company seeking registration as a Peer to Peer Lending Platform must have net owned funds of at least Rs 2 crores.
Activities:
The Peer to Peer NBFC shall:
- act as an intermediary providing an online platform for the participants involved in the peer to peer lending process;
- undertake documentation of loan agreements and other related documents;
- store and process all data relating to its activities and participants on hardware located within India;
- undertake credit assessment and risk profiling of the borrowers and disclose the same to their prospective lenders.
The Peer to Peer NBFC shall inter alia not perform the following activities:
- raise deposits as defined under Companies Act, 2013;
- provide any credit guarantee;
- permit international flow of funds;
- permit any secured lending linked to its platform;
- lend on its own.
Limit & Maturity:
The aggregate loans taken by a borrower at any point, across all peer to peer platforms shall not exceed Rs 10,00,000/- (Rupees Ten Lakhs Only) and the aggregate exposure of a lender to all borrowers at any point, across all peer to peer platforms shall not exceed Rs 10,00,000/- (Rupees Ten Lakhs Only). The exposure of a single lender to the same borrower shall not exceed Rs 50,000/- (Rupees Fifty Thousand Only). The maturity of the loan shall not exceed 3 years. The leverage ratio shall not exceed 2:1.
Mechanism:
Fund transfer between the borrower and lender shall be through escrow account mechanisms to be operated by a trustee. 2 escrow accounts are required, one for depositing funds received from lenders and one for repayment by borrowers. Cash transactions are strictly prohibited.
Credit Information:
The Peer to Peer NBFC shall submit data to credit information companies and update it on a monthly basis after taking consent of the participants for providing the required credit information.
Transparency & Disclosure:
The Peer to Peer NBFC shall enter into appropriate agreements with the borrower and lender specifying all the terms and conditions of the NBFC providing the services. Further, it has to disclose to the borrowers and lenders the details of each other including amount of loan, interest rate sought etc. It also has to disclose its business model, overview of credit assessment, grievance redressal mechanism, fair practice code etc on its website.
Information Technology & Business Continuity Plan: The business of the Peer to Peer NBFC must be technology driven and should have adequate safeguards for data protection. Further, the NBFC should have a Board approved business continuity plan in place for safekeeping of information and documents and servicing of loans for full tenure in case of closure of platform.
Reporting Requirements: The Peer to Peer NBFC shall submit a quarterly statement to the RBI stating the number and amounts of loans disbursed, funds held in escrow account, number of complaints outstanding and leverage ratio.
The aggregate loans taken by a borrower at any point, across all peer to peer platforms shall not exceed Rs 10,00,000/- (Rupees Ten Lakhs Only) and the aggregate exposure of a lender to all borrowers at any point, across all peer to peer platforms shall not exceed Rs 10,00,000/- (Rupees Ten Lakhs Only). The exposure of a single lender to the same borrower shall not exceed Rs 50,000/- (Rupees Fifty Thousand Only). The maturity of the loan shall not exceed 3 years. The leverage ratio shall not exceed 2:1.
Mechanism:
Fund transfer between the borrower and lender shall be through escrow account mechanisms to be operated by a trustee. 2 escrow accounts are required, one for depositing funds received from lenders and one for repayment by borrowers. Cash transactions are strictly prohibited.
Credit Information:
The Peer to Peer NBFC shall submit data to credit information companies and update it on a monthly basis after taking consent of the participants for providing the required credit information.
Transparency & Disclosure:
The Peer to Peer NBFC shall enter into appropriate agreements with the borrower and lender specifying all the terms and conditions of the NBFC providing the services. Further, it has to disclose to the borrowers and lenders the details of each other including amount of loan, interest rate sought etc. It also has to disclose its business model, overview of credit assessment, grievance redressal mechanism, fair practice code etc on its website.
Information Technology & Business Continuity Plan: The business of the Peer to Peer NBFC must be technology driven and should have adequate safeguards for data protection. Further, the NBFC should have a Board approved business continuity plan in place for safekeeping of information and documents and servicing of loans for full tenure in case of closure of platform.
Reporting Requirements: The Peer to Peer NBFC shall submit a quarterly statement to the RBI stating the number and amounts of loans disbursed, funds held in escrow account, number of complaints outstanding and leverage ratio.
MHCO COMMENT
The RBI had issued a consultation paper on peer to peer lending in April
2016 and has thereafter issued this Master Direction to formalize and
regulate the entire structure of peer to peer lending. This was needed
in the present scenario so as to enable a fixed regime and compliance of
the laid down norms by the platforms who wish to undertake peer to peer
lending. The Master Direction should prevent abuse by the participants
in the peer to peer lending process.
The views expressed in this update are personal and should not be
construed as any legal advice. Please contact us directly on +91 22
40565252 or legalupdates@mhcolaw.com for any assistance.
