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
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
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
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
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
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.
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”)– to officially regulate and monitor such platforms.
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.
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
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
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
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.
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
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
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.
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.
Name - Sheethal Menon, IV BA LLB, ILS Law College, Pune, Maharashtra
Address – Flat No.12, 4 th floor, Pratapgad Building, Opp MMCC, BMCC road, Pune,
Banking Laws Articles
Invocation of Bank Guarantee
The Fugitive Economic Offenders Bill, 2018
How to Start a Legal Process Outsourcing Business?
SC Quashes RBI Circular Asking Banks To Take Defaulting Companies To Insolvency
Bombay HC Imposes Cost of Rs 50K On Petitioner Firm For Abuse of Law By Filing
Multiple Proceedings On Similar Grounds
How To Register a Company
Limited Liability Partnership In India
Money Laundering in India
Corporate Social Responsibility
Franchise laws in India