The Reserve Bank of India on Wednesday finally published the guidelines to regularise the peer-to-peer lending platforms as Non-Banking Financial Companies (NBFC), a move which can be seen as a part of the bigger structural reform to formalise the credit system in the country.
Peer-to-peer (P2P) platforms are lending marketplace for loans where lenders and borrowers can interact and transact on a mutually agreeable rate. These platforms are not in large numbers currently, but the central bank sees them as an alternative form of finance where formal finance is unable to reach. The biggest reason why P2P lending holds a future as an alternative financing system is that borrowers get uncollaterised loans on these platforms, which formal banking system does not allow. In return, lenders get to charge higher interest rates than banks.
The RBI said P2P lending, even though of no significant in value, yet can “disrupt the financial sector and throw up surprises” in future, and the associated risks to the financial system are “too important to be ignored”.
The RBI in its final guidelines on Wednesday said that P2P lending will work on the tri-partite arrangement of the lender, the borrower and the trust. The trustee will maintain two escrow accounts one for lenders and one for borrowers. Even though P2P platforms will only act as intermediaries, they will maintain the exchange of information between lenders, borrowers and trustees. The central bank has given three months to the existing P2P platforms for registering themselves as NBFC-P2Ps. The RBI has laid down following criteria for registering under Non-Banking Financial Companies (NBFC) :
- P2Ps should have a minimum Rs 2 crore capital
- P2Ps cannot take any loan exposure themselves
- P2P will undertake credit assessment and risk profiling of the borrowers and lenders
- P2P will maintain documents related to loan agreements
- P2P will provide assistance in disbursement and repayments of loan amount
- P2Ps cannot hold balance sheet or funds
- P2Ps cannot cross-sell products except for some insurance products
The P2P platform feels that RBI’s directions validate their business model and bring credibility. Faircent.com, which is a three-year-old P2P platform says that with RBI stepping in, there would be a proper redressal system in place which will protection to lenders. “This is an extremely positive step for the P2P lending business. The retail millennial lenders, an investor demographic which has been focussed on extensively in the regulations will be leveraging the power of the crowd for the benefit of small
borrowers,” Vinay Mathews, Founder & COO, Faircent.com said.
Vinay Mathews also said that with RBI regularising P2P, more lenders and borrowers will start using P2P for loans, which will expand the market in future. Lendbox, Rupaiya Exchange, LenDen Club are some other P2P platforms.