RBI proposes to regulate peer-to-peer lending sector

Mumbai: RBI on Thursday released a consultation paper on peer-to-peer (P2P) lending, in order to bring the sector under its purview, by proposing a minimum capital requirement of Rs 2 crore for the players and barring them from promising extraordinary returns.

P2P lending is a form of crowd-funding that can be defined as the use of an online platform, which matches lenders with borrowers in order to provide unsecured loans. Crowd funding generally refers to a method of funding a project or venture through small amounts of money raised from a large number of people.

Considering the present stage of development, the platform could be registered only as an intermediary, meaning it would be limited to bringing the borrower and lender together without the lending or borrowing getting reflected on its balance sheet, the paper said.

"The platforms will be prohibited from giving any assured return, either directly or indirectly... It will also 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," it said.

Also, P2P lending platforms may be prohibited from "promising or suggesting a promise of extraordinary returns, which implies some form of guarantee of returns to lenders".

RBI, which for the first time has proposed to regulate this growing sector, has sought comments till May 31.

"The prudential requirements will include a minimum capital of Rs 2 crore," the paper added.

With a view to ensure there is "enough skin in the game" at a later date, the RBI document said leverage ratio may be prescribed so that the platforms do not expand with indiscriminate leverage.

Further, "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 added.

The current regulations applicable to other NBFCs will be made applicable to the P2P platforms in regard to recovery practice.

While RBI has powers to regulate companies or cooperative societies, the P2P platforms run by individuals, proprietorship, partnership or Limited Liability Partnerships, do not fall under the purview of RBI.

Hence, it is essential that P2P platforms adopt company structure, RBI said, adding no entity other than a company can undertake such 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," the paper proposes.

According to the data released by P2PFA, the cumulative lending through P2P platforms globally, at the end of Q4 of 2015, reached 4.4 billion pounds.

There is no credible data available regarding total lending through P2P platforms in India.

In India, P2P lending platforms are largely tech companies registered under the Companies Act.