RBI’s consultation paper completely misses making a mention on various regulations and laws that a P2P platform should be mindful of, in the normal course of its business
Startup culture in India is on a rise. Business models driven by first generation entrepreneurs leveraged on information technology are now transforming lives in various ways. This coupled with the policy focus now is ready to become a revolution attracting attention for industry, government, regulators alike. Peer to peer lending (more popularly called P2P lending) has been in news globally, with China reporting fraud cases, the US taking forth maiden securitisation issuances and Reserve Bank of India (RBI) announcing possibility of regulatory intervention on the business model.
However, the concept paper from RBI is not without issues or concerns. The major concern with the proposed framework is the blatant decision of RBI to qualify the platform as non-banking financial company (NBFC). It is most important for RBI to delve on the question whether the platform at all qualifies to be an NBFC without carrying out any business of lending or investment or without being engaged in any financial activity.
Further, with the rigorous impetus on promoting entrepreneurship in the country, the P2P platform requires a minimum owned funds of Rs2 crore. It would be bizarre to expect a startup to infuse this kind of money and equating the fund requirement to that of an NBFC.
What is also difficult to understand is barring these intermediaries to route the money of the lenders and the borrowers through the platform.
The consultation paper completely misses making a mention on the various regulations and laws that a P2P platform should be mindful in course of its business.
Consultation Paper in Brief
The consultation paper explains briefly the process flow of P2P with a comparative on how the business model is dealt with in various jurisdictions. While in Japan and Israel, P2P is prohibited completely, in other countries the spectrum varies from being completely unregulated as in case of China to under banking regulations in France, Italy to multiple layers of regulations as in case of the United States.
As per the Consultation Paper there are 30 P2P platforms operating in India and are acting as aggregators for the lenders and the borrowers.
P2P process flow
The process flow of the business model is explained as below:
a. Lenders and borrowers on-board the platform
b. There is an initial screening undertaken by the platform
c. The lender then bids for the borrower’s loan process and the borrower has the liberty of accepting or rejecting the same. The documentation for the loan transaction is facilitated through the platform.
d. Some platforms provide credit assessment and recovery functions in addition to acting as a virtual intermediary.
e. The money is routed from the lenders account to the borrowers account and other way for the repayment.
Concerns on P2P business model
The concerns expressed by RBI in this business process are on a) KYC process and b) on the recovery practices, which the central bank believes could also be coercive at some stage.
The consultation paper deals with the issue of whether the business model should be regulated at all. While the rationale for not regulating a budding sector as P2P is to ensure that the regulations are not too stringent and to allow efficient and accessible avenue for borrowers who either do not have access to formal financial channels or are denied loans by them. On the other hand, the impact of the business model on banks and NBFCs and its ability to disrupt the financial sector attracts the need for regulation.
Therefore, RBI feels that if the sector is left unregulated the risk of unhealthy practices developing which may have deleterious consequences and therefore there should be right kind of regulatory and supervisory mechanism to harness the spirit of the business model.
Highlights of proposed regulations
To this end and intent, RBI has proposed to regulate the platforms as NBFCs as defined under the RBI Act. The platform cannot be housed in any entity other than a company.
The proposed regulatory framework is broadly classified under the following heads:
a. Permitted activities
i. Permissible business
The platform will be operating for the limited purpose of bring the borrowers and the lenders under a single platform
The platform can opine on the credit worthiness of the borrowers
The platform will ensure that the money is routed directly from the lenders’ bank account to the borrowers’ bank to ensure there is no threat of money laundering.
ii. Non-permitted activities
The platform will ensure that provisions of Section 45S of the RBI Act are not attracted by its activities
The platform will not be assuring returns to the lenders either directly or indirectly
The platform will be prohibited from doing cross-border transactions in view of the FEMA provisions.
iii. There will be separate regulations on the advertisement about the platform
b. Prudential regulations on capital
i. The platform will be required to bring minimum capital of Rs2 crore to ensure skin-in-the-game
ii. The regulations will also limit the leveraging capabilities of the platform.
c. Governance requirements
i. The guidelines for fit and proper person criteria for the promoters, directors and CEOs shall apply
ii. Board should have sufficient experience in financial sector
iii. The P2P lender will be required to have a brick and mortar place of business
iv. The management and operational personnel of the platform would need to be stationed within the country
d. Business continuity plan
i. The platform needs to have adequate risk management systems
ii. In case the platform fails to continue there should be an alternative arrangement for the continuity of the operations
e. Customer Interface
i. The customer data should be secured and should remain confidential
ii. Transparency in operations and minimum disclosures under fair practices code will be mandated.
iii. Current regulations as applicable to NBFCs on the recovery guidelines shall apply to P2Ps as well.
iv. There should be a grievance redressal mechanism to address the complaints of the borrowers and lenders.
f. Regulatory reporting
i. The platform will be required to report financial position, loans arranged each quarter, complaints etc. to the Reserve Bank.
Concerns on the Proposed Framework
While one will have to wait for the draft regulations to be released, the consultation paper does not seem to get into the core essence of the business and seems to be driven with the compulsive need for bringing about regulations. One is forced to think, what is the moot point of the consultation paper – addressing the current ambiguity or an urge to regulate?
(Nidhi Bothra is executive vice president at Vinod Kothari Consultants Pvt Ltd)