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P2P Lending In India

Peer-to-peer lending or commonly known as "P2P lending" are platforms which aims at providing individuals alternate sources to fund their capital requirements. The platform assists in this process by listing various lenders along with their terms and conditions, verifying the identity and initial credit worthiness of the borrowers, disbursing loans and collecting loan repayments etc. This paper gives an introduction to the P2P lending sector and also discusses the key features of the recently released RBI notification regulating these P2P lending platforms.

Introduction:
Lending can be considered as one of the oldest professions in the world. In the last decade, the world has witnessed a large number of financial innovations. Blockchain technology, Peer-to-Peer (P2P) lending and Bitcoin are a couple of new innovations and financial avenues that are bringing about a paradigm shift from big banks and the deepest pockets to the smart individuals and startups.

P2P lending or ‘Peer to Peer lending’ or ‘social-lending’ or ‘crowd-lending’ is the contemporary method of borrowing money via online platforms that connect borrowers with lenders. They are driven by innovative, cutting-edge technology. P2P technology has emerged as the world’s fastest growing lending and borrowing platform and also one of the most innovative financial technology of the recent times. It is indeed an effective alternative to the traditional methods of borrowing money through banks and other financial institutions. P2P lending platforms aim to provide an additional source of funding to meet their capital requirements.
The common trend in India is that around 70 percent people are rejected from availing a personal loan from banks or NBFCs due to various reasons and most of the time only those who draw an annual gross salary of Rupees 3 lakhs or higher can avail such loans. However, P2P lending works differently and fills this lacuna by using various parameters to determine the credit worthiness of the borrower.

Rapid growth of P2P lending can be witnessed in the global space in terms of both volume and number of players. USA, UK and China have been dominating the world market in terms of P2P lending. UK was the first country to start a P2P lending online platform by the name Zopa, however, in India it started taking shape in the year 2012. The industry in India is at very nascent stage and has limited operating history, however it will continue to grow.

How Does It Work?
i. The platform provides assistance to the public by giving out a list of lenders and their respective terms and conditions.
ii. The process begins by people signing up to the various lending platforms like PeerLend as a borrower or as a lender.
iii. A borrower submits an application for availing a loan along with his details and KYC documents.
iv. The platform then identifies the credit worthiness of the said borrower. A credit check is conducted to identify the risk involved in investing in a particular borrower and this further determines the rate of interest.
v. The profiles of the borrowers are seen by various lenders. They then review these profiles and can ask further questions before deciding whether to invest in them or not.
vi. Such platforms allow lenders to directly lend to other people by having them register and providing their ID and address proof.
vii. Once the loan offered by the lender is accepted by the borrower, the platform then proceeds on preparing a loan agreement document which is signed by both the parties.
viii. The money is divided up into units which are generally termed as ‘Notes’. However, there is no fixed value and it varies with the platform.
ix. Subsequently, the lender makes an online payment of the loan amount and the borrower pays back to the lender online in equated monthly installments.
x. Both the lenders and the borrowers subsequently pay an amount as commission to the platform for the said services it provides.

Why Does One Choose P2P Lending?
The advantages offered by P2P lending are sweeping its way through in winning over the traditional investment instruments. One of the many reasons which draw money lenders to peer-to-peer lending is the fact that they are investing in real people, not some faceless bank or mutual fund. It assures a fixed and higher return compared to the other sources and as a result of which they are not vulnerable to market turbulence. P2P loans also are considered to be reliable, hassle free and speedy. They render lower interest rates to borrowers and also have fixed rates unlike credit cards. And, finally, P2P Loans have much lower fees than most other options and does not have prepayment penalty either.

P2P loans apart from being accessed by millions of borrowers and lenders, for fast personal loans, festival loans and other kinds of loans in India, are also quite popular among businessmen today with almost 30% of loans being taken from websites like LenDenClub for their respective business purposes. Hence it is seen to be good at rescuing people from their day-to-day financial dilemmas.

Statutory Recognition:
Although the popularity of these platforms has increased tremendously in the recent past, they remained unregulated until recently. The Reserve Bank of India (RBI) released a consultation paper on regulating P2P platforms in 2016, proposing to bring them under its purview by categorizing them as NBFCs. Once the feedbacks and comments of the public and stakeholders were taken into consideration, the RBI released it Master Direction–Non-Banking Financial Company – Peer to Peer Lending Platform (Reserve Bank) Directions, 2017 (the“Directions”)[1]– to officially regulate and monitor such platforms.

Prudential Requirements:
As per the Directions, only corporate entities registered as ‘Company’ can operate and engage in the said business. However, P2P platforms which are run by individuals, proprietorship, partnership or limited liability partnerships do not fall under the purview of RBI. The companies subsequently have to obtain a Certificate of Registration from the RBI within a period of 3 months from the date of publication of the Directions. The minimum capitalization requirement, which is line with the requirement for all NBFCs as per Section 45-IA of the Reserve bank of India Act, 1934 is INR 2,00,00,000 ( Rupees Two crore Only).

The RBI gives an in-principle approval for setting up a prospective NBFC-P2P platform once it is satisfied with an application. The company must then develop its technology platform as per the RBIs satisfaction and also submit all relevant legal documents within a period of 12 months.

Permitted Activities:
The Directions lay down the following as permitted activities/services:
i. It can act as an intermediary, marketplace or an aggregator to bring forward the meeting of borrowers and lenders.
ii. It allows customers with little or no security to avail loans.
iii. The lenders signing up with the platforms do so at their own risk as they do not provide any guarantee of return.
iv. Foreign lenders have been deliberately excluded from participating directly in such platforms, unless they have a bank account in India.

Operational Guidelines:
As per the Directions, the NBFC-P2P shall have a board approved policy in place:
Setting out the eligibility criteria for participants on it.
Determining the pricing of services provided by it.
Setting out the rules for matching lenders with borrowers in an equitable and non-discriminatory manner.
It shall be responsible for the activity of its service providers in the event of outsourcing. In order for a loan to be disturbed it is necessary that the lenders have approved the borrowers of the loan and all concerned participants have signed the loan contract.

Credit Information Companies (CICs):
Every NBFC-P2P is require to be a member of all CICs and submit relevant data to them. It shall keep the credit information maintained and updated on a monthly basis or as decided by the NBFC-P2P and the CICs. All measure are taken to ensure that the information collected is accurate and complete.

Disclosure Requirements:
I. To The Lenders

In order to help the lenders make an informed decision, they must be provided with information such as personal identity of the borrower, loan amount, credit score and such other details.

ii. To The Borrowers:
The borrowers however are not made aware of the personal details of the lender. They are informed about the lenders proposal, repayment terms and interest rates.

iii. To The Public:
Every individual or entity looking to register on the platform was given an opportunity to make an informed decision by providing an overview of the credit assessment methodology, data protection and privacy measure, dispute settlement mechanism etc.

Data Security And It Framework:
All platforms are required to provide ‘adequate safeguards’ in their IT systems to prevent unauthorized access, destruction, utilization etc. A board approved business continuity plan must be put into place for safekeeping of information and documents. The platform must also conduct a yearly information system audit as well adhere to all requirements under the Master Direction on Information Technology Framework for the NBFC Sector, June 8, 2017.

Risk Involved In The P2P Lending Sector:
a) Regulating the loan disbursement cash flow model could result in huge operational complexities for the platform firm with regard to keeping track of loans disbursed and amount repaid.
b) There are chances of data privacy laws being breached in the event of names of borrowers and lenders being disclosed in their websites.

c) KYC and AML checks must be done to prevent money laundering and routing illegal sources of funding.

d) Lack of strong cyber security controls could pose a great threat and the money could be accessed by hackers who can penetrate and take out all the required details from the platform and use it to gain competitive advantage.

Conclusion:
By the year 2020, India will have more than 1 billion internet users each of them having round the clock access to the online loaning facility. With the world proceeding towards being a paperless, cashless and technology friendly economy, Directions like these will act like a catalyst in economy’s growth and will help open various avenues for meeting capital requirements. However, the Directions are silent regarding the penalty and repercussions in the event of failure to adhere to the guidelines. Considering such platforms are still nascent in India, these Directions are apt and well thought through.

End-Notes
[1] https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11137

Author's Profile:
Name - Sheethal Menon, IV BA LLB, ILS Law College, Pune, Maharashtra
Mobile- 9673329532
Address – Flat No.12, 4 th floor, Pratapgad Building, Opp MMCC, BMCC road, Pune, 411004

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