Starting A Peer-To-Peer Lending Business In India - Corporate and Company Law - Corporate/Commercial Law (2024)

In this article, we discuss the various aspects of peer-to peer lending ("P2P Lending") business in India and the things that should be kept in perspective before engaging in P2P Lending.

India Corporate/Commercial Law

In this article, we discuss the various aspects of peer-to peerlending (“P2P Lending”) business inIndia and the things that should be kept in perspective beforeengaging in P2P Lending.

What is P2P Lending?

P2P Lending is a type of lending process which is done through alending platform wherein the lenders and borrowers are connectedthrough the lending platform. The lending platform acts as anintermediary whereby it connects the lenders and borrowers based onthe loan amount and risk appetite of the lenders. The platform alsofacilitates loan disbursal, credit assessment, repayment etc.

Who can engage in P2P Lending?

Only a non-banking financial company(“NBFC”) having a certificate ofregistration from the Reserve Bank of India(“RBI”) can engage in P2P Lending.Such NBFCs shall have a minimum net owned fund of at least Rs. 2Crores.

Mechanism for P2P Lending

Three parties are involved in P2P lending: borrowers, lenders,and the P2P platform. Borrowers and lenders register on the P2Pplatform, and the P2P platform connects the borrowers with thelenders depending on the lender's risk appetite and theborrower's loan requirements. The P2P charges a finder'sfee for connecting the borrowers and lenders and facilitating theloan. P2P platforms also do credit assessments of borrowers andprovide lenders with an option for a variety of borrowers to lendbased on their risk appetite, borrower's credit assessment,and loan amount requirements. Lenders can give several loans todifferent borrowers and thus diversifying their loan portfolio andmitigating their risk.

Benefits of P2P Lending

The P2P Lending business provides borrowers to an easy access tonumber of lenders for unsecured loans as an alternative totraditional institutional lenders, which have been proven to besomewhat difficult to get loans owing to the several factors viz.higher interest rates, higher credit scores etc. For a country likeIndia with large population, there are several people inrequirement of a small unsecured loan amount without any hassle andP2P Lending paves the way for the same. P2P Lending also providesan investment option to lenders to lend money to several borrowerswithin its comfort.

Regulatory framework

The RBI has issued Master Directions – Non-BankingFinancial Company – Peer to Peer Lending Platform (ReserveBank) Directions, 2017 (“P2P MasterDirections”), which governs P2P Lending in India.Since P2P platforms are NBFCs, they have to comply with otherdirections, circulars and legislation issued by the RBI and asapplicable to them.

A few snippets of the regulatory framework as per P2P MasterDirections are provided below:

1. The NBFC shall not raise deposits as defined under section45I(bb) of the RBI Act, 1934 or the Companies Act, 2013;
2. The NBFC shall not lend on its own or cross sell any productexcept for loan specific insurance products;
3. The NBFC shall not facilitate or permit any secured lendinglinked to its platform;
4. The NBFC shall not permit international flow of funds;
5. The NBFC shall not hold, on its balance sheet, funds receivedfrom lenders for lending or funds received from borrowers forservicing loans;
6. Fund transfer between the participants on the P2P platformshall be through escrow account mechanisms operated by a bankpromoted trustee. At least two escrow accounts, one for fundsreceived from lenders and pending disbursal and the other forcollections from borrowers, shall be maintained;
7. The Company shall create appropriate policies and comply withprudential norms as specifically detailed out in the P2P MasterDirections.

Key Considerations for a P2P platform

There are specific considerations which a P2P platform (company)shall keep in mind who wish to engage in P2P Lending, some of whichare enumerated below:

1. The company shall be incorporated in India;
2. The company shall have the necessary technological,entrepreneurial and managerial resources to offer services toparticipants;
3. The promoters and directors of the company shall be fit andproper;
4. The company shall implement a robust and secure informationtechnology system;
5. The company shall submit a viable business plan for conductingthe business of P2P Lending.

The content of this article is intended to provide a generalguide to the subject matter. Specialist advice should be soughtabout your specific circ*mstances.