RBI categories P2P activity as NBFCs

Reserve Bank of India (RBI), the regulator of lenders, Wednesday brought Peer-to-peer lending (P2P) under its regulatory purview through a notification.
P2P, a crowd-funding model (largely online) where people looking to invest their money platforms, will now be treated as non-banking financial companies (NBFCs).
The central bank will soon release the final guidelines for these platforms.
Till April 2016, there were around 30 start-up P2P lending companies in India. As many as 11 P2P lending platforms were registered by the central bank last year.

These include Faircent, Paisadukaan, Finzy, OMLP2P, 5paisaloans, RupeeCircle, IndiaMoneyMart, etc.
5paisaloans, a part of Mumbai-based financial services provider India Infoline, which is listed on the bourses.
P2P concept is centered around savers getting higher interest by lending money instead of saving and borrowers get comparatively lower interest rates.
Under the P2P business model, an auction is conducted where the lender can make a bid for a borrower’s loan requirements and the borrower can either accept or reject the bid.
Further, the platform can offer services such as credit assessment, recovering loans, and so on. The platform generally co-ordinates the transaction between the lender and the borrower.
It is believed that P2P has the potential to improve access to finance for small and medium enterprises.

Essentially, they are fintech companies licensed as a separate category of NBFC and are expected to restrict its lenders and borrowers to a cap of Rs 10 lakh of total exposure in the space.
The interest rate on the loan can range from 8.95% to 30% and the loan amount can be between Rs 30,000 and Rs 5 lakh. Usually people take loan for business, family event, application purchase and home improvement.
Meanwhile, the loans between lenders and borrowers are approved with a signed contract, but it falls under the category of unsecured loan.

P2P lending platforms are largely tech companies registered under the Companies Act. Once the borrowers and lenders register themselves on the website, due diligence is carried out by the platform and those found acceptable are allowed to participate in lending/borrowing activity.
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.
Some platforms provide several additional services like credit assessment, recovery etc. In most cases, the platform moderates the interaction between the borrower and the lender.
At present, such platforms have very low regulatory restrictions because they merely act as intermediaries between borrower, lender, and partner bank.

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 platform facilitates collection of post-dated cheques from the borrower in the name of the lender as a proxy for repayment of the loan.
A P2P lender should carry out due diligence of its participants, do a credit assessment and risk profiling of the borrowers on its platform and disclose the details to prospective lenders on the platform. A P2P lender should obtain prior and explicit consent from the participant to access their credit information and have documentation of loan agreements and related documents. A P2P lender should also assist in the disbursement, repayments and recovery of the loans.

The maximum tenure for the amounts lent under P2P lending is fixed at three years. A P2P has to disclose to the lender the details of the borrower, including the credit score and details of the terms of the loan. A P2P has to disclose the details of the lender to the borrower other than the personal identity and contact details.
The P2P is responsible for the recovery of the loans granted using their platform. The P2P should have a robust process for screening of participants, updating data to minimise loan repayment defaults. The P2P can also render services for recovery of loans granted under their platform. However, the P2P is responsible for the actions of its service providers, including recovery agents.

Having said this, this form of credit availability is relatively new in India and it remains to be seen how its gets popular ahead as we believe that despite the small ticket size and larger margins here, the risk quotient is very high.
In the present scenario of liquidity pressures seen for frontline NBFCs, it remains to be see how existing players here ramp up operations here as overall risk quotient in the financials space in the present market is quite high with a high risk to asset quality ahead in the near term.

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