Seeking to regulate the growing peer-to-peer (P2P) lending activity in the country, the Reserve Bank of India has issued a consultation paper proposing to prohibit cross-border transactions and limit money transfer only between lender and borrowers’s bank account to eliminate possibility of money laundering.
The RBI has also proposed a minimum Rs 2 crore capital requirement for platforms. The central bank has said that it would prescribe leverage ratio at a later date “so that the platforms do not expand with indiscriminate leverage.
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.”
It has proposed prohibiting P2P platforms from promising or suggesting a promise of extraordinary returns, which implies some form of guarantee of returns to lenders.
RBI has also proposed that no entity other than a company can undertake P2P lending activity. This will render such services provided under any other organisational structure illegal.
P2P lending are online platform that matches lenders with borrowers in order to provide unsecured loans. The borrower can either be an individual or a legal person requiring a loan. The interest rate may be set by the platform or by mutual agreement between the borrower and the lender. Fees are paid to the platform by both the lender as well as the borrower.
The paper proposed that P2P platforms could be registered only as an intermediary limited to bringing the borrower and lender together without the lending and borrowing getting reflected on their balance sheet. The platforms will be prohibited from giving any assured return either directly or indirectly.
“It will be mandated that funds will have to necessarily move directly from the lender’s bank account to the borrower’s bank account to obviate the threat of money laundering,” the RBI consultation paper has proposed.
The guidelines would also prohibit the platforms being used for any cross-border transaction in view of FEMA provisions relating to transactions between residents and non-residents.
The final guidelines will include ‘fit and proper’ criteria for promoters, directors and CEO. 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. The management and operational personnel of the platform would need to be stationed within the country.
RBI has said platforms need to put in place adequate risk management systems for its smooth operations. “Business Continutity Plans and back up for the data needs to be put in place since the platform also acts as a custodian of the agreements/cheques etc. In case of failure of the platform to continue its operations, it should have a ‘living will’ or alternative arrangement in the form of an agreement for continuation of its operations,” the discussion paper has said.
P2P lenders would also be required to maintain customer confidentiality. “Most platforms operating in India provide a credit score for the borrowers using their customised algorithms. Confidentiality of the customer data and data security 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.
RBI has pointed out some platforms perform the role of a recovery agent for recovery of loans on behalf of lenders. It has proposed current regulations applicable to other NBFCs made applicable to the P2P platforms in regard to recovery practice. The operators would also be mandated to have a proper grievance redress mechanism to deal with complaints from both lenders and borrowers and require reporting to the Board.