By Shubhangi Kulkarni
Peer to peer lending uses online platforms for matching prospective lenders and borrowers without the use of a financial intermediary. As it operates online, it helps borrowers borrow at lower interest rates. It also helps lenders earn higher returns as compared to savings and investment products offered by banks. There are 30 companies in India that work in this space. These companies mainly focus their portfolio on microfinance, commercial loans, and consumer loans. According to the latest KPMG –NASSCOM report, the growth potential for the market is huge. This is due to the fact that there are about 57.7 million small businesses in the country. Some of the leading P2P lenders in India are i2ifunding, Loanmeet, Faircent, LenDenClub, i-Lend, and Milaap.
The sector has remained largely unregulated for quite some time. However, the RBI has floated a consultation paper last year. This paper established that companies need to be registered as special category Non-Banking Financial Company (NBFC). On October 4, 2017, the RBI developed master guidelines for regulating the sector.
Guidelines developed by the RBI
Every company seeking registration as NBFC-P2P will have to seek a certificate of registration from the Central Bank. They should have a net owned fund of not less than Rs 2 crore or a higher amount as the bank may specify.
A company should have the technical, human and material prowess to run an institution of this kind. It can provide a platform for borrowers and lenders. However, it cannot raise funds or lend on its own. It cannot provide for credit enhancement and guarantee or provide secured lending linked to the platform. Moreover, it cannot hold funds received from lenders for lending and that received from borrowers for servicing loans on its balance sheet. Additionally, it cannot cross-sell any product except for an insurance related product or permit international flow of funds. The platform is supposed to perform due diligence, credit assessment of borrowers and lenders and documentation of loan agreements.
Integral norms of the master guidelines
The platform has to maintain a leverage ratio that does not exceed two. The amount that a prospective lender can lend across all P2Ps is limited to Rs 10 lakhs. The same is the amount that a borrower can borrow across all P2Ps. The exposure of a single lender to the same borrower across all P2Ps is Rs 50 thousand. The maturity of the loans should not exceed 36 months. Further, fund transfers between participants should be through escrow account mechanism. Two escrow accounts should be maintained—one for collections from borrowers and the other for funds received from lenders and pending disbursal. The escrow mechanism should be managed by a trustee. Moreover, all funds transfers should be between bank accounts and cash transactions are prohibited.
The minimum capital requirement might weed out non-serious players in the sector as it puts a burden on compliance. The market consists of borrowers who are genuine but do not have access to credit facilities due to multiple factors. Hence, the status of NBFC will help the companies create a mark for themselves in the area of small unsecured loans. P2P lending will be on par with other asset classes such as mutual funds and SIPs. Thus, the guidelines will lead to higher investments for the sector bringing in technological innovation.
However, the industry wanted to be recognised as a separate entity and not be classified under the umbrella of NBFCs.
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