Crowdfunding, especially raising unsecured loans through an online platform(peer to peer/P2P lending) has emerged as a popular form of raising money globally. In India also, there are a number of online platforms which have come into existence in past one year. However, being a new phenomenon, there is a lack of regulations and Reserve Bank Of India (RBI) has come up with a consultation paper to propose guidelines to regulate Peer to Peer lending in India.
What is P2P Lending Anyway And Why RBI?
First things first, peer to peer lending, unlike equity, debt based or fund based crowd funding which fall under the jurisdiction of capital market regulator SEBI, involve loans which are paid back with interest. So, it comes under the jurisdiction of RBI.
P2P lending involves an online platform which connects borrowers and lenders enabling borrowers to raise loans from lenders with a rate of interest decided by platform or between the two parties.
Both parties pay fees to the online platform which may also provide additional service of collecting loan repayments and doing preliminary assessments on the borrower’s creditworthiness.
P2P lending allows first-time borrowers or borrowers who are unable to raise money from banks or investors to raise money on small interest rates compared to raising from money lenders/unorganized sector.
In India, RBI estimates about 30 startup P2P Lending companies among which close to 20 companies have been launched in the last one year.
Why/Why Not Regulate P2P Lending?
RBI has put forward both positive and negatives of regulating P2P lending which is still in its nascent stage in India. Among the positives, regulation will ensure that there could be no surprises given the potential of online funding to disrupt the traditional lending by banks or NFBCs(NonBanking Finance Corporations).
A proper regulation framework will also lead to the creation of an alternative finance route where formal finance is unable to reach (small or independent business owners) 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.
Moreover, P2P lending will prevent unhealthy practices or undesirable elements posing as borrowers putting lenders at a high risk.
Now, there are also some disadvantages of regulating P2P lending. And those are mainly because of the industry still being in a very nascent stage which do not pose any immediate threat on monetary policy transmission mechanism.
RBI also fears that strict regulations at this stage may stifle the growth of an innovative, efficient and accessible avenue for borrowers who either do not have access to formal financial channels or are denied loans by them.
Moreover, regulatingP2P lending may attract lenders with little understanding of risks involved in these platforms to attract high-risk borrowers.
What Has RBI Proposed?
Given the fact that RBI has looked onto both positives and negatives of regulating this sector, RBI seeks to adopt a balanced approach to deal with 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,” the paper said.
Firstly, since RBI does not have any control over individuals, proprietorships, partnerships or limited liability partnerships, it requires P2P platforms to be registered as companies.
It has also proposed to bring P2P lending platforms under its jurisdiction by defining them as NBFCs. It has put a minimum capital requirement of 2 crores with companies in order to act as P2P platforms.
To ensure that right people are operating these P2P platforms, promoters, directors and chief executive officers of P2P platforms will have to meet a “fit and proper” criteria and some board members may need to have a background in finance.
In the later stages, P2P platforms may be required to have a “brick-and-mortar” presence in India and need to submit regular reports on their financial position, loans arranged each quarter, complaints and so on to RBI.
Platforms would only be limited to acting as a medium to exchange and cannot function as banks by seeking and keeping deposits. The money raised through their platforms should be transferred between bank accounts of two parties to avoid any money laundering.
They would also have to guarantee confidentiality of customer data and follow existing guidelines to recover loans
In addition to above, these platforms cannot assure any returns to lenders and there would be a maximum limit on the amount by lenders so that new lenders or those with a lack of awareness can be protected.
RBI has sought comments and feedback on the discussion paper on various aspects revolving around needs of regulations; other risks to be addressed and whether the approach and assessment of P2P lending in the proposal are adequate. The last date of submitting feedback on the discussion paper is 31st May.