RBI proposes regulatory framework for P2P lending platform

Mumbai: The Reserve Bank of India (RBI) on Thursday proposed registering of peer-to-peer (P2P) lending platforms as non-banking finance companies (NBFCs) so that they can be brought under the regulatory purview of the central bank.

In a consultation paper released on its website, the banking regulator has suggested regulating the permitted activities of P2P lenders, along with capital requirements, governance and business continuity plans of such entities. The regulator, however, has stayed away from any strictures on the amount of lending that can be done through these platforms and the rate at which this lending is done, which is what the industry had sought during its discussions with the regulator.

“Considering the significance of the online industry and the impact which it can have on the traditional banking channels/NBFC sector, it would be prudent to regulate this emerging industry. In its nascent stage, this industry has the potential to disrupt the financial sector and throw surprises. A sound regulatory framework will prevent such surprises,” said the RBI, while making the case for some regulation of the sector.

“The balance of advantage would lie in developing an appropriate regulatory and supervisory toolkit that facilitates the orderly growth of this sector so that its ability to provide an alternative avenue for credit for the right kind of borrowers is harnessed,” it added.

Close to 20 new online P2P lending companies have been launched in the last one year. At present, there are around 30 start-up P2P lending companies in India, RBI said, quoting news reports

To begin with, the RBI says that P2P lenders must act only as intermediaries and their role must be limited to bringing the borrower and lender together. Funds must move directly from the lender’s account to the borrowers’ account to prevent risk of money laundering. Cross-border transactions will not be permitted.

“The platforms will be prohibited from giving any assured return either directly or indirectly. The platforms will be allowed to opine on the suitability of a lender and creditworthiness of a borrower. Adequate regulations on advertisements will also be put in place,” said the RBI in the paper.

The RBI suggests that these companies have a minimum capital requirement of Rs.2 crore at the start.

“With a view to ensure that there is enough skin in the game at a later date, leverage ratio may be prescribed so that the platforms do not expand with indiscriminate leverage,” RBI said in its proposed prudential guidelines for these platforms.

Given that the lenders may include uninformed individuals, prudential limits on maximum contribution by a lender to a borrower/segment of activity could also be specified, the proposed guidelines noted. The RBI did not specify what these limits would be.

The regulator also proposes that a fit and proper criteria be applied to promoters, directors and chief executive officers (CEO) of P2P platforms.

“A reasonable proportion of board members having financial sector background could be suggested. The guidelines may also require the P2P lender to have a brick and mortar place of business in India,” RBI said in its consultation paper.

In order to assist monitoring, the platforms will need to submit regular reports on their financial position, loans arranged each quarter, complaints etc. to the Reserve Bank. The regulator said that it may come out with a detailed reporting requirement.

“It may be noted here that RBI has powers to regulate entities which are in the form of companies or cooperative societies. However, if the P2P platforms are run by individuals, proprietorship, partnership or Limited Liability Partnerships, it would not fall under the purview of RBI,” the regulator said in its paper.

Thus, the regulator suggests that these companies be asked to adopt an organisational structure and no entity other than a company undertake this activity.

“This will render such services provided under any other organisational structure illegal. Alternatively, the other forms of structure may be regulated by the State Governments,” RBI said.

To protect the interest of the customers, the RBI says that confidentiality of customer data would be the responsibility of the platform. “Transparency in operations, adequate measures for data confidentiality and minimum disclosures to borrowers and lenders would also be mandated through a fair practices code,” said the RBI. Platforms that assist in loan recovery will need to adhere to existing guidelines on recovery practices, it added.

Feedback on the RBI consultation paper has been invited till 31 May.