P2P lending in India is legal but as of now unregulated. However, the Reserve Bank of India (RBI) has been closely assessing the need for regulation in this industry and has also come up with a consultation paper and suggested draft rules. Further, as per recent newspaper reports the draft rules which were released in April, 2016, have been accepted by the Ministry of Finance, Government of India (GoI) and should be finalised within July, 2017. Some suggestions for a regulatory framework in the draft consultation paper are:
- P2P platform can only be registered as an intermediary and cannot provide assured return directly or indirectly
- Cross-border transactions will be regulated in view of the foreign Exchange Management Act (FEMA) regulations
- The platform should have a minimum capital of Rs. 2 crores
- Limits on maximum contribution by one lender to a specific borrower
- Guidelines with regard to promoters and CEOs
- Data confidentiality of the customers
- It will be a prerequisite to register as a Non-Banking Financial Company (NBFC) and guidelines applicable to NBFCs may be applicable
- Regular reports have to be submitted to RBI
It is important to note that NBFCs can only be organised as companies or co-operative societies, therefore P2P platforms presently constituted as partnership firms or Limited Liability Partnerships may be required to undergo a change in constitution.
An interesting point often overlooked is the State specific money lending laws. Thus, many states have their own comprehensive legislations dealing with money lenders. It can be easily argued by P2P platforms that they are aggregators of lenders and borrowers and thus do not fall under the definition of money lenders. Nevertheless, there is still a risk that an individual lender on these platforms may be considered as a money lender. A money lender as defined in various state acts is a person who has a substantial business of advancing loans. Thus if the individual lender’s main source of income is through the money lending activities on the P2P platforms, there would be a risk that these individuals may come under the definition of a “money lender”. If these platforms are recognised as NBFCs and registered with the RBI, as proposed in the draft consultation paper, then the P2P platforms will clearly be outside of the ambit of such state laws.
Since, regulation by the RBI is impending, it would also be interesting to note some of the other aspects of RBI regulation of NBFCs generally which may become applicable to P2P platforms. Some of these are:
- NBFCs are supposed to be organised as companies, therefore P2P platforms presently constituted as LLPs or partnerships may be required to undergo a change in constitution.
- Making of minimum investments as stipulated in RBI notifications in central, state government securities.
- Maintenance of a Reserve Fund comprising at least 20% of the Net Profits.
- RBI is empowered to wind-up an NBFC taking into consideration, amongst others, ‘public interest’.
- Compliance with regulations concerning investments, takeovers and change in management, which usually requires a prior approval from the RBI.
- Compliance with RBI prescribed Know Your Client (KYC) norms and Anti-money Laundering (AML) standards.
- Compliance with the RBI prescribed Fair Practice Code guidelines. These require, amongst others, that all communications to the borrower shall be in the vernacular language or a language as understood by the borrower and the set-up of appropriate grievance redressal mechanisms.
- A NBFC also comes under the purview of regulations relating to Credit Information Companies. Thus, P2P lending platforms will have to regularly disclose credit information, both current and historical, to enable the creation of robust databases with Credit Information Companies.
RBI has been given fairly subjective powers to frame regulations/ guidelines for NBFCs, thus P2P platforms will also need to prepare for the future course of the policy.
SEBI Consultation Paper:
RBI Consultation Paper:
RBI Publication on Money Lending:
RBI Consultation Paper on P2P Lending: Legality and Implications