The Cambridge Dictionary defines Peer as a person who is the same age or has the same social position or the same abilities as other people in a group.1 As the phrase Peer-to-Peer Lending2 suggests, it is from of lending from one person to another.

This concept of lending is not new to India. We have had an history, a dubious one at that, of people lending monies or their worth to another and exploiting the borrowers for unruly gains to the lender. Over a period of time this from of lending was replaced by a robust Banking system, to address the short comings and the vices of money lending.

With times changing, we now live in a world that has been changing rapidly because of the advent of technological advancements. Every aspect of our life has had an impact � for the better or for the worse � of technology. The way financial needs were addressed has also gone a sea of change. The traditional ways of financing are fast being challenged by concepts like Cryptocurrency, Crowd Funding and Peer-to-Peer Lending.

Before we get to understand what the P2P lending constitutes, we have to look at the concept of Crowd Funding.

• Crowd Funding:
  'Crowd Funding' generally refers to a method of funding a project or venture through small amounts of money raised from a large number of people, typically through a portal acting as an intermediary. There are numerous forms of crowd funding, some are charitable donations that provide intangible benefits but no financial returns; others, such as equity crowd funding would fall within the domain of financial markets.
   
• P2P lending:
  P2P lending is a form of crowd-funding used to raise loans which are paid back with interest. It can be defined as the use of an online platform that matches lenders with borrowers in order to provide unsecured loans. P2P lending is also referred to as "Digital Lending." Such an online platform brings together people looking to invest their monies with people who want to borrow money. The online platform acts as a facilitator, and the said loan transaction is backed by an agreement between the person investing and the person borrowing.
  
  The borrower can either be an individual or a legal person requiring a loan. The interest rate may be set by the platform or by mutual agreement between the borrower and the lender. Fees are paid to the platform by both the lender as well as the borrower. The borrowers pay an origination fee (either a flat rate fee or as a percentage of the loan amount raised) according to their risk category.
  
  The lenders, depending on the terms of the platform, have to pay an administration fee and an additional fee if they choose to use any additional service which the platform may provide. The platform provides the service of collecting loan repayments and doing preliminary assessment on the borrower's creditworthiness. The fees go towards the cost of these services as well as the general business costs. The platforms do the credit scoring and make a profit from arrangement fees and not from the spread between lending and deposit rates as is the case with normal financial intermediation.
   
• P2P lending hits and misses:
  The following are some of the benefits of P2P lending platforms: 3
  
  • Eliminating intermediaries and their incremental margins, results in competitive interest rates and lucrative cost advantages.
  • Hassel free and fast process. Instant connection between lenders and the borrowers
  • Minimal documentation, cuts down the hefty documentation process and makes borrowing easy.
  • Less formal, continent and efficient operational structures
  • Possibility of loans to borrowers with low monthly income. Lenders subjective call whom he wants to give loan and whom not.
  • Direct negotiations between the borrower and the lender possibility to get loans at a lesser rate than the banks.
  • Economies of scale.
    
    The following are some of the pitfalls involved in P2P lending:
    • There might be a long waiting period before you get the right match on similar terms.
    • P2P loans are exposed to higher credit risks. Many borrowers on these platforms possess a low credit rating, and are mostly the ones who cannot avail the loans from the Banks / Financial Institutions.
    • Recovery of money in case of default is a big issue.
    • Unregulated interest rates. No upper limit.
    The Reserve Bank of India4 - Consultation Paper:
    The RBI released a Consultation Paper on P2P lending in April 2016.5 The paper, amongst other things discussed about the operating models of P2P lenders in India and also the need and the manner to regulate P2P lending.
     
  • P2P Operational Model in India:
    P2P lending platforms are largely technology companies registered under the Companies Act, 20136 and acting as an aggregator for lenders and borrowers. Once the borrowers and lenders register themselves on these platforms, due diligence is carried out by the platform and those found acceptable are allowed to participate in lending/borrowing activity. Some platforms provide several additional services like credit assessment, recovery etc. The documentation for the lending and borrowing arrangement is facilitated by the P2P platform. The lender transfers money from his/her bank account to borrower's bank account. The P2P forum, in general, also helps in the recovery process and as part of this, follows up for repayments. The lending is primarily from one individual to another.
     
• Reverse Auction Model:
  The companies often follow a "Reverse Auction Model" in which the lenders bid for a borrower's loan proposal and the borrower has the freedom to either accept or reject the offer. a reverse auction is an event where the buyer puts a request for goods and services they need, and sellers bid the price for the specified goods and services. At the end of the reverse auction, the seller who quotes the lowest amount will win the auction.
   
• Regulatory Concerns:
  The regulatory concerns in such cases would relate to Know your customer requirements and recovery practices. It was pointed out by the said paper that since all payments are through bank accounts, the KYC exercise can be deemed to have been carried out by the banks concerned. Though these platforms claim to follow soft recovery practices, the possibility of use of coercive methods cannot be ruled out.
   
• Whether to regulate or not:
  The aforementioned consultation also discussed the varied international practices on regulation of the P2P lending business, ranging from the P2P lending being treated as an exempted or an unregulated market, or it being regulated under the Banking / Intermediary laws or such activities being prohibited completely.
  
  RBI also deliberated on the basic question as to whether the P2P lending activities in India, should indeed be regulated or not. It weighed the arguments both, for and against regulating such activities, and finally decided that:
  The balance of advantage would lie in developing an appropriate regulatory and supervisory toolkit that facilitates the orderly growth of this sector so that its ability to provide an alternative avenue for credit for the right kind of borrowers is harnessed," and proposed a regulatory structure in the said consultation paper. The proposed regulatory framework would encompass the permitted activity, prudential regulations on capital, governance, business continuity plan (BCP) and customer interface, apart from regulatory reporting.
   

The Arithmetic of P2P lending platforms in India:
As of 21st May 2021, there are a total of 21 P2P lending platforms registered with the RBI.7 It was termed as a "A sunrise sector" in the Indian financial sector landscape, and was estimated that the P2P lending, has grown more than 10 times in one year on a year-on-year basis.8 Although, consolidated financial analysis could not be undertaken due to lack of availability of such data, the P2P lending platforms have reported to have made an average of 12-14 percent returns for their lenders in the pandemic year.

Faircent, India's first P2P lending platform to have received the NBFC-P2P license by the RBI, disbursed Rs 1,145 crore loan in FY21 compared to Rs 920 crore in FY20, a jump of 24 per cent. Another P2P platform LenDenClub recorded a whooping 739.10 per cent growth in disbursement in FY21.9 Broadly speaking the low-risk borrower will get an interest rate of 12-13% while the rate for a high-risk borrower can go up to 25-30%.10

Considering the details mentioned hereinabove and the focus that the current Government at the Centre has on digitization and he prospective of quick funds for borrowers through a simplified process, it is a no brainer that the P2P lending sector has a huge growth potential. Reluctance of Banks towards funding customers with low credit score and poor financial status, will work to the benefit of this sector as well.

The Regulatory Framework.
There is no doubting that, a growing economy needs a robust financial system, and a financial system to be robust, there has to be an efficient regulatory system in place. Having looked at the details of the functioning of the P2P lending scenario in India in the preceding chapter, I would now focus on the regulatory framework governing it.

• P2P institutions to be a Non-Banking Financial Company:
  In concurrence to the recommendations of the Consultation Paper of April 2016,11 The RBI, on being satisfied that it is necessary to do so, in exercise of the powers conferred on it by sub-clause (iii) of clause (f) of Section 45-I of the Reserve Bank of India Act, 1934,12 with the prior approval of the Central Government, vide a Notification date Aug. 24th 2017,13 specified that a non-banking institution that carries on 'the business of a peer to peer lending platform' shall be a "Non-Banking Financial Company" (NBFC).
  
  The said circular also clarified that the term "the business of a peer-to-peer lending platform" shall mean the business of providing under a contract, the service of loan facilitation, via online medium or otherwise, to the participants who have entered into an arrangement with that platform to lend on it or to avail of loan facilitation services provided by it.
  
  By doing so, The RBI was in a position to regulate and issue directions with regards to the functioning of the P2P lending platform.
   
• The Master Directions, A Step to Regulating P2P institutions:
  On the backdrop of the aforementioned notification14 The RBI, on being satisfied that it is necessary to do so, in exercise of the powers conferred under section 45IA, 45JA, 45L,and 45M of TRBI Act, and of all the powers enabling it in this behalf, issued the Non-Banking Financial Company � Peer to Peer Lending Platform (Reserve Bank) Directions, 2017,15 to be complied by every Non-Banking Financial Company that carries on the business of a Peer-to-Peer Lending Platform.
  
  The said Master Directions have been updated / amended from time to time by The RBI.
  
  The following are some of the key regulatory features brought in by the said Master Directions:
  
  • Eligibility Criteria:
    It was mandated that a for a NBFC to undertake P2P lending activities, it had to be "Company" � as defined by the Companies Act, 2013.16 Such a company should have a net owned fund of not less than rupees twenty million or such higher amount as The RBI would specify. Further any NBFC wanting to commence or carry on the business of a P2Per Lending Platform had to obtain a Certificate of Registration (COR) from The RBI Bank. All existing NBFCs carrying P2P business were given 3 months to seek a COR from the Bank. Such NBFCs were to have the necessary technological, entrepreneurial and managerial resources to offer such services to the participants.
     
  • In-principle Approval followed by a COR:
    It is provided that after being satisfied that the eligibility conditions are fulfilled, The RBI grants in-principle approval for setting up of a Peer-to-Peer Lending Platform, subject to such conditions which it may consider fit to impose. Within the period of twelve months, the company shall put in place the technology platform, enter into all other legal documentations required and report position of compliance with the terms of grant of in-principle approval to The RBI. The RBI, after being satisfied that the entity is ready to commence operations, shall grant a COR as an NBFC�P2P.
     
  • Scope of Activities:
    The Master Directions, laid down the scope of activities that the NBFC - P2P, which was to act only as an intermediary for providing an online marketplace or platform to the participants involved in P2P lending could engage in. The said NBFC � P2P was prohibited from lending on its own, or provide any credit guarantee. They were also prohibited from providing secured lending. All the loans given on such platform shall be clean loans. It also prohibited international flow of funds. It was entrusted with the responsibility of undertaking due-diligence of all participants including credit assessment and risk profiling of borrowers.
     
  • Prudential Norms:
    The aggregate exposure of a lender to all borrowers at any point of time, across all P2P platforms, capped at Rs Fifty Lakhs. Any lender investing more than Rs Ten Lakhs shall produce a certificate to P2P platforms from a practicing Chartered Accountant certifying minimum net-worth of Rupees Fifty Lakhs. Similarly, the aggregate loans taken by a borrower at any point of time, across all P2Ps, was subjected to a cap of Rupees Ten Lakhs. Most importantly, the exposure of a single lender to the same borrower, across all P2Ps, was capped at Rs Fifty Thousand. The maturity of the loans was capped at 36 months.
     
  • Operational Guidelines:
    Operational guidelines include, having a Board approved policy in place setting out the eligibility criteria for participants, pricing of services provided by it, rules for matching lenders with borrowers in an equitable and non-discriminatory manner. Obligations of the institution with respect to their responsibility for the actions of its service providers including recovery agents and the confidentiality of information pertaining to the participant that is available with the service providers. All loans are to be disbursed after the individual lender/s have approved the individual recipient/s of the loan and all concerned participants have signed the loan contract.
     
  • Funds Transfer Mechanism:
    A detailed guidelines on how the transfer of funds should take is also laid down by the Master Directions and the Annexure therein. It is mandated that all fund transfers shall be through and from bank accounts, routed through escrow accounts and cash transaction is strictly prohibited.
     
  • Submission of Data to Credit Information Companies and Disclosure Requirements:
    It is mandated that a NBFC � P2P shall become a member of all Credit Information Companies, and submit historical as well as updated data relating to borrower transactions to such companies. Detailed disclosure requirements, with respect to the lender and the borrower as well as public disclosures, are also laid down.
    
    These include, credit score, interest and amount of loan sought, terms and conditions of the loan, portfolio performance, grievance redressal etc. The institution is also required to put in place a Fair Practices Code, to be reviewed and periodically by the Board of such companies.
     
  • Grievance Redressal Mechanism and Reporting Requirements:
    The setting up of a grievance redressal mechanism is mandated by the Master Directions, including an escalation matrix, and the appointment of a Nodal Officer. Explicit and detailed requirements are made for reporting matters to The RBI as laid down therein. Obligations and responsibilities related to outsourcing activities are also mentioned therein, including maintaining confidentiality and security of data and the monitoring of such activities.
     
  • Applicability of Ombudsman Scheme for Non-Banking Financial Companies, 2018:
    In the best interest of the participants, The Ombudsman Scheme for Non-Banking Financial Companies, 201817 is made applicable to the NBFC - P2P � subject to meeting the thresholds mentioned therein.
    
    A complaint can be filed by a customer on the following grounds:
    
    • Interest/Deposit not paid / paid with delay.
    • Cheque not presented / done with delay.
    • Not conveyed the amount of loan sanctioned, terms & conditions, annualized rate of interest, etc.
    • Notice not provided for changes in agreement, levy of charges.
    • Failure to ensure transparency in contract/loan agreement.
    • Failure/ Delay in releasing securities/ documents.
    • Failure to provide legally enforceable built-in repossession in contract/ loan agreement.
    • RBI directives not followed by NBFC.
    • Guidelines on Fair Practices Code not followed.
    The Ombudsman Scheme promotes settlement through conciliation and if not reached, an award or an order can be passed.
     

Conclusions / Suggestions.
After having looked at the operational model in the first chapter, it is pretty obvious that the sector, well and truly has exponential growth potential and will be a key player, over a period of time in the economic evolution of India. However, such growth has to have proper checks and balances to ensure that the pest interests of all the participants therein are best protected and for that reason it was a step in the right direction, to classify the P2P platforms as NBFCs and bringing it under its own regulatory framework.

However, there are a few issues that I would like to point out in the current regulatory framework, which if addressed, will galvanise the growth of this sector.

• Non availability of industry wise data:
  It has been almost 4 years now that The RBI has started regulating NBFC - P2P platforms but there is no authentic data that is being made available by The RBI with regards to consolidated performances of P2P platforms, the industry default rates, total size of the businesses etc. Transparency on the operational front will help build public faith in the institution and galvanise their growth prospects. All you Bank upon is the disclosures by the respective companies on their own websites. Further if the P2P company is a closed held private limited company, the disclosure requirements would be considerably lower than in case of a public limited company.
   
• Unregulated interest rates:
  The Master Directions are silent on the mechanism underlying the interest rates that can be charged by the lenders on the P2P platform. They are left unregulated under the guise of demand and supply, credit profiling, demographics etc. Although it is not a bad economic model to let a free market decide the borrowing rates, the application of this rule will have an issue with the Indian market because of the basic mix of the population. Gullible, illiterate borrowers would stand exposed to contracting to insanely high interest rates, without realising the financial impact of those, just because they are creating liquidity.
   
• RBI disclaimer on P2P platform websites:
  Every one of the 21 P2P platform that have been given the COR by The RBI, hosts a disclaimer on the following lines:
  "Reserve Bank of India does not accept any responsibility for the correctness of any of the statements or representations made or opinions expressed by Lendbox, and does not provide any assurance for repayment of the loans lent on it."17
  
  This is paradoxical. On one hand The RBI says it is regulating the sector and on the other is shrugging off responsibility. If the RBI is not accepting responsibility, why stress upon regulating the sector. Would The RBI put such a disclaimer on all Bank websites? Probably not.
  
  Furthermore, such a disclaimer does little to boost investor confidence, a pre-requisite for any successful economy.
   
• Ombudsman Scheme for Non-Banking Financial Companies, 2018:
  The Ombudsman Scheme for Non-Banking Financial Companies, is applicable to NBFCs, as defined in Section 45-I(f) of the Reserve Bank of India Act, 1934 and registered with the RBI under Section 45-IA of the Reserve Bank of India Act, 1934 which (a) are authorised to accept deposits; or (b) have customer interface, with assets size of one billion rupees or above, as on the date of the audited balance sheet of the previous financial year.
  
  The NBFC-P2P do not accept deposits from the investors, they only act as an intermediary. So, the Ombudsman Scheme will be applicable only to companies with an asset base of one billion rupees, which might not be the case with many of the NBFC-P2P, thus leaving them outside the ambit of the said Scheme.

Whatever has been pointed hereinabove are small issues capable of being addressed easily. There are absolutely no two opinions that the Master Directions and the overall regulation of the P2P sector by the RBI are a step in the right direction and in the best interests of all participants, and all that they need is a little bit of fine tuning to bridge the small gaps that may hinder the efficient working of the said sector. In my opinion, The RBI has done an amazing job trying to balance the economic benefits and the security aspects whilst regulating the NBHC-P2P sector.

Finally, it is highly improbable that any system of governance, operation, regulation or control can ever be full proof or perfect. But there is always a possibility of improving upon set norms, to be in tune with the changing times based upon past experiences. The regulatory framework governing the NBFC-P2P is no exception.

End Notes:

1. Cambridge Dictionary, Peer, available at https://dictionary.cambridge.org/dictionary/english/peer , last seen May 10th 2021
2. [Hereinafter P2P].
3. Bankbazar.com, Peer to Peer Lending, available at https://www.bankbazaar.com/personal-loan/peer-to-peer-lending.html , last seen June 11th 2021.
4. [Hereinafter The RBI].
5. Reserve Bank of India, Consultation Paper On Peer To Peer Lending, available at
6. https://rbidocs.rbi.org.in/rdocs/Content/PDFs/CPERR280420162D5F13C3A2204F4FB6A2BEA7363D0031.PDF , last seen May 10th 2021.
7. The Companies Act, No 18 of 2013, available at https://www.mca.gov.in/Ministry/pdf/CompaniesAct2013.pdf , last seen Jun.13th 2021
8. Reserve Bank of India, Non-Banking Financial Companies, available at https://rbi.org.in/Scripts/BS_NBFCList.aspx , last seen Jun. 11th 2021.
9. Namrata Acharya, P2P lending achieves 10 fold growth with returns as high as 25% in 1 year, Business Standard, Feb.15th 2020, available at https://www.business-standard.com/article/finance/in-last-1-year-p2p-lending-achieves-ten-fold-growth-with-returns-up-to-25-120021201166_1.html , last seen Jun. 11th 2021.
10. Aparajita Sharma, 14% return in a year, P2P lending catches investor eye, Business Today, Apr.28th 2021, available at https://www.businesstoday.in/money/investment/14-percent-return-in-a-year-p2p-lending-catches-investors-eyes/story/437764.html , last seen Jun. 11th 2021.
11. P2P Report, India and Global 2019 -20, Vinod Kothari Consultants, available at http://vinodkothari.com/wp-content/uploads/2020/01/India-P2P-report-2019-2020-1.pdf , last seen Jun. 13th 2021.
12. Supra Note 5.
13. The Reserve Bank of India Act, No 2 of 1934, available at https://rbidocs.rbi.org.in/rdocs/Publications/PDFs/RBIA1934170510.PDF , last seen Jun.13th 2021, [Hereinafter the RBI Act].
14. Saba, RBI Classifies P2P lending firms as NBFCs, The SCC Online Blog, Sep.21st 2017, available at https://www.scconline.com/blog/post/2017/09/21/rbi-classifies-p2p-lending-firms-as-nbfcs/ , last seen Jun.13th 2021.
15. Id.
16. Master Directions - Non-Banking Financial Company � Peer to Peer Lending Platform (Reserve Bank) Directions, 2017, Oct 04th 2017, available at, https://rbidocs.rbi.org.in/rdocs/notification/PDFs/MDP2PB9A1F7F3BDAC463EAF1EEE48A43F2F6C.PDF , last seen Jun.13th 2021.
17. Supra Note 6.
18. The Ombudsman Scheme for Non-Banking Financial Companies, 2018, available at https://rbidocs.rbi.org.in/rdocs/Content/PDFs/NBFC23022018.pdf , last seen Jun.13th 2021.
19. Lendbox, RBI Disclaimer, available at https://www.lendbox.in/rbi-disclaimer , last seen Jun.13th 2021.