By Vineet Aneja and Abhishek Singla, Clasis Law
Online lending transactions are in their nascent stage in India and given the increase in peer-to-peer (P2P) lending through e-commerce marketplace it is of extreme importance to regulate such transactions. Accordingly, the Reserve Bank of India (RBI) has recently issued “Master Directions – Non-Banking Financial Company – Peer to Peer Lending Platform (Reserve Bank) Directions, 2017” (“Directions”) to regulate company that carry on the business of P2P lending platform (P2P lending platform) in India.
One of the main elements of the Directions is the mechanism specified in relation to the registration of a P2P lending platform. As per the Directions, an existing/prospective P2P lending platform is permitted to carry its business if the following conditions are fulfilled:
(i) it is a company;
(ii) it has a net owned fund of not less than Rs20 million or such higher amount as RBI may specify; and
(iii) it has obtained a certificate of registration from RBI.
The Directions make it mandatory for an existing P2P lending platform to obtain registration within three months from the effective date, being October 4, 2017.
A P2P lending platform is permitted to engage in various activities, such as:
(i) provide online marketplace to the participants involved in P2P lending thereby acting as an intermediary;
(ii) conduct due diligence on the participants and credit assessment and risk profiling of the borrowers; and
(iii) undertake loan documentation.
In terms of restrictions, a P2P lending platform is barred from carrying out various activities, such as:
(i) raising deposits, lending on its own and permitting international flow of funds; and
(ii) cross-selling of product (except for loan-specific insurance products) and providing/arranging any credit enhancement or credit guarantee.
A P2P lending platform is required to put in place a board-approved policy to address grievances/complaints of participants. In case a complaint is not redressed within a period of one month, the participant shall have the right to appeal to the Customer Education and Protection Department of RBI.
In terms of prudential norms, the Directions states that the aggregate exposure of a lender to (i) all borrowers across all P2Ps lending platforms should not exceed Rs1 million; and (ii) a single borrower across all P2P lending platforms should not exceed Rs50,000. Also, the aggregate loans which can be availed by a borrower across all P2Ps lending platforms have been capped to Rs1 million. Additionally, the maturity of loans obtained through P2P lending platform cannot exceed 36 months. To monitor the above exposure limits, a P2P lending platform is required to obtain a certificate from borrower and lender, as applicable, which states that the limits prescribed above have been adhered to by the respective participant.
The Directions clearly specify the fund transfer mechanism which needs to be adopted by a P2P lending platform for the purpose of running the business of P2P lending. At least two escrow accounts need to be set up and maintained, wherein one account is for funds received from lenders and the other account for funds collected from the borrowers. The escrow accounts shall be operated by a trustee, which shall be promoted by the bank maintaining the escrow accounts.
Any takeover/acquisition of control of a P2P lending platform or any change in shareholding of a P2P lending platform that results in acquisition of 26 percent or more of the paid-up equity capital of the P2P lending platform would require prior written consent of RBI. Further, any change in management of a P2P lending platform that results in a change in more than 30 percent of the directors (excluding independent directors) or any change in shareholding that gives the acquirer a right to nominate a director shall also require prior written consent of RBI. Subsequent to the receipt of approval from RBI. P2P lending platform and other concerned parties would have to give a public notice of change in management/control at least 30 days before such change is made effective.
To monitor the functioning and smooth running of P2P lending platform, RBI has also stipulated certain reporting requirements in the Directions.
The Directions mainly aim at establishing a constructive set of norms that would govern the process of establishing and the functioning of P2P lending platform in India. Given the growing popularity of online lending transactions in the country, it was necessary to regulate P2P lending platform.
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