While intending to set up a P2P platform, one may not find legal provisions for this at present. However, with the popularity of the concept, the laws and regulations will have to evolve
Globally peer-to-peer (P2P) models are a phenomenon and are as easily accepted as the conventional model of lending. Some offspring of P2P model, such as crowd funding also are becoming popular in India in the philanthropy sector. Considering the novelty of the idea, there are several issues to tackle while intending to set up a P2P platform, which one may not find legal provisions to currently, however, with the popularity of the concept, the laws and regulations will evolve as well.
In India, the traditional sources of funding are well established. Banks and financial institutions in India have been largely responsible for making available credit in the economy. This apart, where conventional sources of funding have not been available the needs of the financially excluded have been catered to through community-based financing, chit funds, co-operative societies advancing loans to its members and so on. The sourcing of funds at the granular level to bring about financial inclusion has been sporadic and disorganized and hence at small scale. All these sources of funding, conventional or otherwise, over the years have had a limitation of physical interface.
With the advent of technology, the world seems to be shrinking and so have the dynamics of communication, transactions and contractual understandings changing. The need for physical interface is reducing constantly. The upside of the technological advent is the outreach for any person has increased manifold; I could reach out to anyone anywhere in the world at any given point of time, also reach out to several people across world simultaneously, at the same time. This upside has led to innovation in the lending business as well, whereas virtual interface/ marketplace can be created for buyers and sellers.
The emergence of technology aided innovations such as peer to peer Lending (P2P) models. Such web portals act as a conduit or a virtual platform to be more specific, to bring together the lenders and the borrowers virtually. The web portals do not undertake credit underwriting or financing business – it just provides lists the borrowers and the lenders, making lending opportunity available from one to many.
The basic functions that the web portal carries out are that of a service provider and on a broader perspective include the following:
a. Provide a platform for lenders and borrowers to meet;
b. Basic information about borrowers and lenders;
c. Providing ancillary services for the financial transaction and carrying out operational activities ancillary to financial arrangement.
d. The platform can provide services pertaining to loans for facilitating the lending transactions but does not subsume the role of the borrower or the lender in any of the transactions.
While there are no specific regulations guiding the peer to peer lending model, there are some nagging questions which one needs to address while determining the question of setting up a P2P lending platform.
Legal Aspects:
Following questions addresses the basic queries that may come into the mind of new entrants into this sector:
1. Should the Company running this platform require a NBFC registration with RBI or with state money lending law?
NBFCs are regulated by the RBI Act, 1934 and various directions issued by the RBI on this behalf. Section 45I (f) of the RBI Act, 1934 defines NBFCs as ‘a financial institution which is a company.’ Section 45I (c) defines financial institution as:
‘Financial institution’ is defined to be those institutions which are engaged in financial activities.
Since the principal business of the company/ platform is to connect the lender and the borrower, the company itself is not engaging in the activity of financing/ funding it is merely providing for a platform for the lenders and borrowers to meet and is charging servicing fees for rendering such a platform. Hence, the activity carried out by the platform under the present business model would not qualify to be carrying out financial activity and hence not an NBFC requiring registration with the RBI.
With regard to applicability of the money lending law or registration of the company under the Money Lender’s Act, most states have their own Act. Money Lender includes any such person or firm carrying the business of money lending.
Again, by the same logic, since the business model of the company is to merely provide a platform for facilitating lending activity, the platform itself cannot be said to be providing loans or advances, rather is a service provider charging a nominal fees in facilitating the financing business. Hence registration under money lending laws may not be required.
2. Will the cash account maintained for the lenders/ investors by the platform qualify as public deposits under RBI’s “Acceptance of Public Deposit” directives?
The amount held by the P2P lending platform will be for and on behalf of the lenders. The platform will only act as a facilitating agent for the multiple transactions taking place on its platform, neither does it on-lend nor does it aggregate or allocate the funds of the lenders. It is merely acting as a conduit and an interface for facilitating the virtual meeting.
Going by that analogy, any amount held in trust for and on behalf of another person shall not qualify to be deposit as per the Companies (Acceptance of Deposits) Rules, 2014.
3. Claw-back rights of the creditors of the company running the platform on the cash accounts of the investors in the event of bankruptcy of the company?
The Company/ platform is holding money in trust for lenders in the cash account created for the lenders under the conditions mentioned in the business model. The Company/ platform would neither be lending out on behalf of the lenders from this cash account, nor operating this account, at will, for the benefit of the lenders. Therefore, the amount in the lenders’ cash account held with the platform cannot be taken as a part of the bankruptcy estate of the platform. Hence, there cannot be a claw-back by the creditors of the company/ platform on the cash accounts created for the lenders which is held in trust by the platform for the lenders.
4. As multiple investors would come together to fund a single loan, will it constitute as “Collective Investment Scheme” as per SEBI CIS Regulations?
Under Section 11AA sub-section (2) of the Securities Exchange Board of India Act, 1934 one of the conditions is that there should be pooling of money for any scheme or arrangement with the purpose of making profits or earning income from the investment and the investment is managed on behalf of the investors. Such platform merely acts as an interface for the lenders and borrowers to meet. However, there is NO pooling in of money which is lent out to borrowers. A single borrower may have multiple lenders but that does not tantamount to pooling of money. Each lender would be lending out to a single borrower. Each lender is maintaining his/ her separate account and is managing the portfolio by making an informed decision. Hence, such platforms would not attract CIS regulations of SEBI.
5. Will the platform be responsible for deducting tax on the income earned by the lenders through this platform?
Platform/ company is only acting as an interface for meeting of the lender and the borrower. The borrower while making payment to the lender for the installments and payment to the platform for services rendered would be liable to deduct tax under section 194A or such other section as may be relevant under the Income Tax Act, 1961.
The platform may be charging fees for the services provided by it to the lenders and the borrowers and the same may be subject to taxes as well.
6. In the event of default of any loan, can the lenders have recourse to the platform?
In the event of default, the platform/ company may use its resources to recover the money from the borrower to the extent of hiring a recovery agent as well; however, the company/ platform shall not assume any liability of repayment of the loan to the lender.
To elaborate further, the company/ platform is not party to any of the loans and does not oblige itself to recovery of money from the borrowers as that would tantamount to assuming liability as a guarantor in the transactions undertaken between the borrower and the lender.
The idea of a P2P platform is not to intermediate in a loan but is to facilitate the loans. Hence while the platform/ company may assist in recovery of the money from the borrower, the liability of non-recovery would be on the lender himself. This can be stated very clearly in the agreements that you enter with the lender to make the understanding clear. Also, please bear in mind that RBI has strict guidelines for engagement of recovery agents.
Since technological intervention is more and more becoming a part of life, the redundancy of physical interaction will be growing in the lending and financial services business as well. Growth of P2P lending models in India is not too futuristic; it probably is the next thing arriving in the country.
(CS Nidhi Bothra is executive vice president at Vinod Kothari Consultants Pvt Ltd and Shruti Agarwal works at Financial Training Division of Vinod Kothari & Co)
The RBI has fixed the rates at which Mudra Bank can lend funds under its refinance scheme for unsecured micro loans. For banks, this will be at cost of funds (COF) + 0.75%, for co-operative or regional rural banks at COF + 3.5%, and NBFCs or MFIs at COF + 4 to 6%. The central bank has also capped the spreads that banks, NBFCs and MFIs (Fig2) can charge borrowers if they avail of refinancing from Mudra. While banks have to lend at base rates, NBFCs and MFIs cannot earn spreads over 6% and 10% respectively, implying lending rates of 16-18% for NBFCs and 20-22% for MFIs. This renders Mudra refinancing unattractive due to the high operating and credit costs involved in unsecured microfinance lending.
Rajeev
5 years agoI do not understand the apprehensions of people like Dr.Anupam Saraph. He continues to say that it is not correct. Why cannot you suggest a solution. It's high time this country had an identity system. Talking of PAN and Passport, both of which are not mandatory for a citizen. The only way is the Aadhar. Technology now helps in solving this major problem much more systematically. Agreed all these would have to be refined over a period of time as new learnings would necessitate change.But not doing anything to address the problems is ridiculous. Next time some one raises such problems moneylife should also insist on a solution.
Being critical for the sake of being critical does not make any sense and behove moneylife.
manoharlalsharma
5 years agoFlat Owners but not Adopted as members in a Co-Operative Housing society.
With due regards,
We, 316 members out of total 454 highly discouraged and most of us are senior- citizens of denial membership from Sri Ganesh co-operative Housing Society, Nerul, Navi Mumbai by the self appointed MC and behave like land mafias and adopted tactics to restraint from action taking authorities against its ulterior motives through lending multiple Vexatious cases in Bombay/HC instead of SC despite already decided case by the same HC in following manner.
(A) PIL-474-1996 then (B) WP- 5771/1997 and (C) SC/10922-98 and also settled by
CIDCO & JTR/CBD.
Our request to your urgent intervene before matter goes very serious as ‘the said housing society committee may gear up for redevelopment on completing20/25years and to ‘save our right of ownership’ from a land mafias in a disguise of MC,
Pg-1/1
Cont;Pg-1/2
We are compelled to Pay our maintenance charges in the hands of self appointed MC and to defend by filing repeated petitions at Bombay HC as follow.
(A) Bombay HC (WP- 4481/2001) against scarping the order of JTR/CBD by the then
Minister (NCP). Based on the Hon’able HCs order, State Ministry issued final order
dated 25/08/2003 vide No- RVA 2702/CR-208/15-C, but the MC again approached
HC and got the STAY through WP-8508/2003
(B) again second time on the intervention of HC, contempt petition No-11/2011,
appointed administrator in 2012 and again concerned Minister (CONG.,) scarped the
order so again HC / WP (St) No 15277/2014 and
(C) recently our Co-operation Hon, minister Shri Chandrakant Patil (BJP) order
dated- 06/02/2015 vide No-RAV-2012/Pra.Kra.690/15C, and once again society MC in
HC with WP (St) No-8132/2015 saying authority is below power and do not come under the Jurisdiction of JTR as well Minister. Q/ now where to Go....
manoharlalsharma
5 years agoBanking on Aadhaar: What concerns the RBI? / What concerns an NOC from a co-operative housing society while each and every right posted in loan agreement while applicant takes loan against his Property.
Simple Indian
5 years agoI can't understand the very concept of Aadhar Card as it's implemented now. Ironically, though it mentions that it does not prove citizenship, it is being pushed hard by governments so aggressively. So, one doesn't need to be a citizen of India to avail of welfare schemes - meant for Indian citizens ???? Strange the SC hasn't noted this glaring error in concept. Moreover, it has been reported that Aadhar Card is issued on fake documents easily, and even to Lord Hanuman, among other deities. With such disorganized way of implementation, I would suggest a few changes to this as below -
1. Make Aadhar enrolment truly voluntary, and against payment of standard fee of say, Rs. 100, and issue a fool-proof chip-based SmartCard to ONLY Indian citizens.
2. Make Aadhar enrolment only through govt offices, not through outsourced agencies / companies.
3. Make certain details editable by Aadhar allotee, such as mobile no, address - recently done by UIDAI, though not publicised well. This will immensely help huge migrant population in cities who often relocate even within a city from one rented house to another. Will save them a trip to Aadhar Enrolment Centre just to get mobile no &/ address updated.
4. Stop the current practice of sending Aadhar Letter through normal post, which often gets lost in transit, dumped by postmen, or misplaced during transit. Instead, Aadhar should be a chip-based Smartcard, from which information should be accessible only with the consent of Allottee (say, a secret PIN No) to prevent unauthorized data access or misuse by unscrupulous persons.
Only if Aadhar data is sanitized and provided to people on cost (in Smartcard form) will they value it, and govt can legitimately use it for many purposes, like preventing pilferage from PDS, other welfare schemes like NREGA, health schemes, etc.
Ashoka.kalgude
In Reply to Simple Indian 5 years agoGovt is on right track in issuing ID to citizens. there are 1,200,000,000 verification to be done it started as only project for bonafied citizen it may take few decades and lakh cr of money. UID started simplest easiest foolproof method to enroll people. Later stage wise Grading will happen.
Avinash Murkute
5 years agoThose who are pro AADHAR, here are the examples - How LPG subsidy was misused by AADHAR. Those who use less number of cylinders in a year (say 3-5), their LPG accounts were transferred subsidy, although they may not have consumed the cylinders. Then such cylinders booked in the name of such consumers were sold in the market by Gas agencies and their workers at a BLACK price. So, what is the use of such AADHAR which provides an opportunity for corruption. Few more questions to PRO AADHARAITES. (a) Will AADHAR give me drinking water (b) Will AADHAR give electricity (c) Will AADHAR give me low priced shelter (d) Will AADHAR gives roads to my villages (e) Will AADHAR account black money in India (f) Will AADHAR stop black money and bribes in India, if any of the answer is YES, please educate me. If someone thinks that technology can control all (for his personal gains) then it is a big HA HA HA.
Ashoka.kalgude
In Reply to Avinash Murkute 5 years agoLPG subsidy goes to bank account, without connivance of user it cannot black marketed. but it is only few incidence compared to earlier. there is no best solution than this. If people willing to be part of looter nothing no system will help. it is like mother herself taking abortion pill.
Arun
In Reply to Avinash Murkute 5 years agoDear Avinash, By making transfer of direct subsidy in account of Adhara holder, Govt is not paying any subsidy on cylinders sold by Gas agencies and their workers out of tern. On rest of the points not only Adhara No, applicable to so many others. It only reflects yours intelligency.
Ravindra Shetye
In Reply to Avinash Murkute 5 years agoLike Aadhar any ID facility can be misused. Ration Card was an example, but Govt could not cancel ALL ration cards because it would have created a bigger mess. PASSPORTS are sometinmes misused or there are cases on multiple passports to the same person. PASSPORTS as a system cannot be cancelled just because some people misuse it. In THIS world, anything, not only Aadhar Card is to be considered after weighing ADVANTAGES against DISADVANTAGES or MISUSE.
BIGGER HA HA HA
Avinash Murkute
In Reply to Ravindra Shetye 5 years agoRation cards are issued under the stipulated Acts. Passports are issued u/the Act. Income tax refunds are issued under the Act. Company incorporation is done under the Companies Act. Under what AADHAR is issued? 2 plus 2 equals to four and not eight as understood by some AADHARITES.
Ashoka.kalgude
In Reply to Avinash Murkute 5 years agopost Modi India govt was almost of corrupt by corrupts for corrupts. So lawmakers are big hurdle in enacting Aadhar act. People behind Anti-Aadhar agitation are beneficiary of Corruptions and their number and clout is immense.
Meenal Mamdani
5 years agoI don't understand the apprehension regarding AADHAR.
Many countries in Asia, Africa and Latin America have a similar number, unique to that individual, to link all transactions, financial or otherwise, that are transacted by that individual. This number is assigned at birth or when the person reaches adulthood, 16 - 18 years.
In India, even now, birth is often not registered so assigning a number linked to a birth certificate is not possible. Similarly with internal migration due to poverty being common, it is difficult to assign a number linked to attendance at school etc is problematic. So a biometric identification is a compromise solution.
Hopefully once the entire country is covered by AADHAR, other identification numbers like PAN will be unnecessary.
svgopal
5 years agoThe above article has not pointed the weaknesses or limitations of the AADHAR. It would have been better had it brought out how the implementation of AADHAR is detrimental to economy / safety & security.
We need to think of the masses who are denied opening of Bank a/cs. What is the better alternative for Direct Money (subsidy) transfer other than AADHAR? ARTICLE IS SILENT ON THESE ISSUES. While criticising you should suggest some better alternative. Why PAN / Election Cards could not be issues to all the citizens and made them mandatory for all ebnefits till now?
Ashoka.kalgude
5 years agoThe writer didn't clearly state how money can be laundered? More important is writer is concerned about is private entity generating AADHAAR IDs.Ignorance about Aadhaar is very glaringly clear and I feel it is as equal to the movement of 1980s against computer in governance and banking by commies. commies made us believe that each computer will replace 5-10 clerks and there will be employment, as we NOW know it is big Ha Ha.
Aadhaar is not issued by private entities but it is generated Using UID servers. Identity issued is unique and it is process of establishing identity of man in foolproof manner using biological markings unique to him in trillions of populations. Opening (shell?) account is possible but it is connected to a man and there is no escape at all wherever he go whatever he do he simply cannot disappear.
shell account is just myth, it will lead to a person at any cost and he is accountable whaterer may be his sex(change) name(change) appearance(change). I think writer is now understood little and not spread roamers onwards to scare people?
MG Warrier
5 years agoIn my article posted here on January 7, 2013 captioned “Will the “Direct Cash Transfer” scheme benefit the common man?” and in an earlier article, I had expressed apprehensions about the utility and future of AADHAAR. No, I am not suggesting abandoning the idea at this late hour. Apex Court is examining the whole issue and a discussion on the subject may not be in order now. If one is permitted to make a suggestion, I would submit that AADHAAR concept should be demystified. If it has to serve as ‘Universal’ (U now stands for UNIQUE) identity card, the base information collected and used should relate to those any individual would like to make public. Like, (a) Name and parents’ name/s (b) Address (c) Normal place of residence and (d) Occupation. Instead of insisting on, such an identity card should be accepted by service providers like banks in lieu of other documents giving the same information. My personal experience some time back was a delivery agent of the postal department refused to accept AADHAAR card as identity proof for delivering a speed-post article in Trivandrum.
Hemant
5 years agoGod knows how suddenly BJP Govt has changed its stance on Aadhar Card,without bothering about the resolving the issues raised by everyone(Including Moneylife).Even today the colleges are asking this no. from students & under fear of not getting exam tickets in future,students pressurize the parents to get Aadhar Card .We had word with college authorities & they in turn says ,What can we do ,govt is asking us to get.Even the Election office guys came to our society & ask everyone to give Aadhar Card No,else says you want be able to vote in next elections.On asking their seniors,they says what can do?we are being pressurize by our seniors.The whole thing is really murky.
Ashoka.kalgude
In Reply to Hemant 5 years agoSimple to understand and remove skepticism is to take out govt and nationality but as human being. Aadhaar is identity (forget who gives) of human ( at present people in India) by marking (biometric)which is unique to him unaffected by mistakes in card. The man himself ID and taged with UID number. On this foundation any service, Governance can be build.
Vijay Chandar
5 years agoI am not clear about the additional risks associated with ABPS as compared to ECS and RTGS. Both of them ultimately depend on an underlying bank account. We have to assume that the bank accounts are properly vetted for KYC and the transactions on the accounts are closely monitored for illegal movements.
SuchindranathAiyerS
5 years agoInitially, Aadhar was introduced, inter alia, to facilitate ease of money laundering, terrorism and easy citizenship for Islamic "refugees" (as came to light in the North East) Or, so it would seem. Meanwhile, as in cases from Speed Bumps to Aazan (Noise Pollution) the Executive Branch and its cronies is in no mood to take the Supreme Court seriously. But the Supreme Court might be comforted as its own High Courts treat it as a sort of "Old Moses" just as the Supreme Court does in upholding the rule of law in appeals before it.
Ravindra Shetye
5 years agoThe Supreme Court order is rather naive, tp be very polite. All Advanced countries have a similar card like Aadhar Card which provides all information about the person and also can be used as an AUTHENTIC ID of the person anywhere, leave alone the Banks. If at all any shortcomings in Aadhar need to be corrected after studying the ID Card systems in Germany and USA.
Ashoka.kalgude
In Reply to Ravindra Shetye 5 years agoNaive by choice given to understand How corrupt judiciary is in India. It is Mother of corruption in India.
Ravindra Shetye
5 years agoThe Supreme Court order is rather naive, tp be very polite. All Advanced countries have a similar card like Aadhar Card which provides all information about the person and also can be used as an AUTHENTIC ID of the person anywhere, leave alone the Banks. If at all any shortcomings in Aadhar need to be corrected after studying the ID Card systems in Germany and USA.
Ravindra Shetye
5 years agoThe Supreme Court order is rather naive, tp be very polite. All Advanced countries have a similar card like Aadhar Card which provides all information about the person and also can be used as an AUTHENTIC ID of the person anywhere, leave alone the Banks. If at all any shortcomings in Aadhar need to be corrected after studying the ID Card systems in Germany and USA.