Overview of Peer-to-Peer Lending License

Peer-to-Peer (P2P) Lending is an online platform that allows individuals to lend and borrow money directly from one another, bypassing traditional financial institutions. This platform connects borrowers seeking unsecured personal loans with investors who wish to lend money in exchange for a higher return on investment. In India, to start a P2P lending business, it is mandatory to obtain a Peer-to-Peer Lending License from the Reserve Bank of India (RBI). This license is granted to Non-Banking Financial Companies (NBFCs) that wish to operate a P2P lending business.

P2P lending is a form of debt financing that operates through online platforms, matching borrowers with lenders. By eliminating the intermediary (a financial institution), P2P lending reduces costs for both parties involved. Borrowers benefit from lower charges, while lenders can earn a higher return on their investments.

The Reserve Bank of India regulates P2P lending platforms in India to ensure that the interests of both borrowers and lenders are protected.

Key Characteristics of Peer-to-Peer Lending Portals

• Online Platforms: P2P lending operates through online portals that connect lenders with borrowers.
• No Prior Relationship Required: Borrowers and lenders do not need to have a prior relationship.
• No Financial Intermediaries: The platform acts as a direct link between the borrower and the lender, eliminating the need for a financial institution to act as an intermediary.
• Freedom of Choice: Lenders and borrowers are free to select terms that best suit their needs, such as the interest rate for lenders and the loan amount for borrowers.

Regulation of Peer-to-Peer Lending in India

In India, Peer-to-Peer Lending platforms are regulated by the Reserve Bank of India (RBI) to protect the interests of both borrowers and lenders. As per RBI guidelines, all existing P2P platforms are required to obtain a Peer-to-Peer Lending License to continue operating.

The RBI has set specific limits for both lenders and borrowers:

• Lender Limit: A lender cannot invest more than Rs. 10 lakhs across all P2P platforms.
• Borrower Limit: A borrower can borrow a maximum of Rs. 50,000 per platform.

The RBI’s active role in regulating the P2P lending system helps improve the credibility of these platforms, ensuring a safer and more trustworthy environment for both parties. These regulations have played a significant role in shaping the P2P lending landscape in India.

Types of Peer-to-Peer Lending Models

Peer-to-Peer (P2P) Lending can be classified into several types based on the nature of the lending:

1. Consumer Lending:
   This model involves small personal loans for various purposes, such as buying a car, going on holidays, funding family or self-weddings, home repairs, or repaying credit card debt.

2. Property Lending:
   In this model, loans are secured against the first charge on commercial or residential property. These loans are typically used for personal mortgages, residential refurbishments, or commercial property development. However, this model is not very popular in India.

3. Small Business Lending:
   This model provides loans to small businesses (SMEs) for purposes such as:

   • Working capital
   • Business expansion
   • Asset finance

How Does Peer-to-Peer Lending Work?

1. Registration:
   The borrower or lender registers on a P2P lending platform by submitting the required information.

2. Due Diligence:
   After registration, the P2P lending platform conducts a thorough due diligence process to assess the financial credibility of the individuals.

3. Profile Creation:
   Individuals with a positive report post-due diligence are approved to create a profile on the platform. This enables them to connect with potential borrowers or lenders, interact, and finalize loan agreements based on mutual consent.

4. Secured or Unsecured Loans:
   Loans may be either secured or unsecured. However, most P2P loans are not covered by government insurance.

5. Loan Transfer Facility:
   Some P2P platforms offer the option to transfer loans as securities for profit or debt collection purposes. This adds flexibility to the loan management process.

This process allows borrowers and lenders to make mutually beneficial deals while bypassing traditional financial intermediaries.

Requirements for Obtaining a Peer-to-Peer Lending License in India

Peer-to-Peer (P2P) lending platforms in India are regulated by the Reserve Bank of India (RBI), which defines these platforms under Section 45I(f)(iii) of the RBI Act as Non-Banking Financial Companies (NBFCs).

Prudential Requirements:

• A minimum capital of Rs. 2 crores is required for registration.

Governance Requirements:

• The platform must meet fit and proper criteria for its Directors, CEO, and Promoters.
• The Board should include members with a strong financial background.
• The platform must establish a physical place of business in India, with management primarily based in the country.

Reporting Requirements:

• P2P platforms are required to submit regular reports to the RBI detailing their financial position, loans arranged, and complaints received each quarter.

Loan Amount Limit:

• The loan amount to any single borrower must not exceed Rs. 1 million.

Allowed Activities:

• The P2P platform functions solely as an intermediary, connecting borrowers and lenders without reflecting the transactions in its balance sheet.
• Platforms are prohibited from offering assured returns on investments.
• The funds should be directly transferred from the lender’s account to the borrower’s account, avoiding the risk of money laundering.

Business Continuity Plan:

• The platform must establish an adequate risk management policy and act as the custodian of cheques and agreements.

Conditions for Obtaining a Peer-to-Peer Lending License

To register as a Peer-to-Peer Lending company, the Reserve Bank of India (RBI) requires the following conditions to be met:

1. Incorporation: The company must be incorporated in India.
2. Resources: The company should have adequate entrepreneurial, managerial, and technological resources to offer P2P lending services.
3. Capital Structure: The company must have a suitable capital structure to operate the platform.
4. Fit Directors and Promoters: The directors and promoters must meet the fit and proper criteria.
5. Management Integrity: The general character of the company’s management should not harm public interest.
6. Information Technology System: If not already implemented, the company must submit a plan for a secure IT system.
7. Feasible Business Plan: A comprehensive business plan for running the P2P lending platform must be submitted.
8. Public Interest: The company must serve the public interest if granted the registration.
9. Other Conditions: The RBI may notify additional conditions to ensure the business operation does not negatively impact public interest.

For New Companies:

For new companies seeking the Certificate of Registration (CoR), the following applies:

• If the company fulfills the above conditions, it can receive in-principle approval from the RBI to set up a P2P lending platform.
• The in-principle approval is valid for 12 months, during which the company must establish its technology platform, complete necessary legal documentation, and comply with RBI requirements.
• After 12 months, if the RBI is satisfied with the company’s readiness, it can grant the Certificate of Registration subject to any additional conditions it deems necessary.

These conditions ensure that P2P lending platforms operate in a manner that safeguards the interests of borrowers, lenders, and the public.