All peer-to-peer lending (P2P) platforms would be treated as non-banking financial companies (NBFCs) and will be regulated by the Reserve Bank of India (RBI), according to a government of India notification released on Wednesday.
The notification is a precursor to the much-delayed final guidelines that the RBI, the banking regulator, will soon be released for regulation of P2P lending in India.
As per RBI, 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. The borrower can either be an individual or a legal person requiring a loan.
If you want to invest money in it, you go to a P2P marketplace and register as a lender.
Interest rates or fees are paid to the platform by both the lender as well as the borrower. 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 Reserve Bank of India, on being satisfied that it is necessary to do so, in exercise of the powers conferred on it by... the Reserve Bank of India Act 1934, (2 of 1934) with prior approval from the government, hereby specifies, a non-banking institution that carries on the business of a peer to peer lending platform to be a non-banking financial company,” the gazette notification sent by RBI to the government stated.
On September 13, RBI Executive Director Sudarshan Sen had said at a conference in Mumbai that the regulator was waiting for a gazette notification from the government specifying that the P2P platforms will fall under RBI’s regulatory purview.
“First, we need the government to notify p-2-p platforms as an entity to be regulated by RBI. That requires a gazette notification. Once that happens, we come out with regulation,” he said.
The RBI had floated a consultation paper in April 2016.
The proposed regulatory framework would encompass the permitted activity, regulations on capital, governance, business continuity plan and customer interface, apart from regulatory reporting.
"P2P lending is one such business model that has gathered momentum globally and is taking root in India. Although nascent in India and not significant in value yet, potential benefits that P2P lending promises to various stakeholders (to borrowers, lenders, agencies etc) and its associated risks to the financial system are too important to be ignored," the RBI consultation paper said.
The regulator had argued in favour of regulating the P2P lending entities in the consultation paper, stating that the sector has the potential to “disrupt the financial sector and throw surprises”.
The paper further stated that the importance of an alternative lending channel which the P2P platforms are offering also needs to be acknowledged.
“P2P lending promotes alternative forms of finance, where formal finance is unable to reach and also has the potential to soften the lending rates as a result of lower operational costs and enhanced competition with the traditional lending channels. If properly regulated, the P2P lending platforms can do this more effectively,” RBI stated in the paper.
Bhavin Patel, Co-Founder & Chief Executive Officer of LenDenClub, said: "This RBI regulation will bring much-needed legal clarity in the system, and lenders/platform will get legal rights to take adequate steps against defaulters. Also, regulation will mean wide acceptability of this concept among lenders as well as borrowers. This will fulfill RBI’s expectation of taking P2P lending to the masses of this country."