RBI tightens norms for P2P Lending Platforms

Recent RBI Circular dated 16th August on P2P NBFC explained and clarifies important pointers . P2P platforms connect borrowers and lenders online, bypassing traditional institutions for direct transactions. This form of lending has been growing, but its overall size in comparison to traditional banking still remains small – currently it is estimated at Rs 7,000-8,000 crore.In revised guidelines, the RBI said a P2P platform should not promote peer-to-peer lending as an investment product with features like tenure-linked assured minimum returns, liquidity options etc.

Here are the synopsis of pointers mentioned by the RBI in the Circular -

1. An NBFC-P2P shall not provide or arrange any credit enhancement or credit guarantee - This explains that P2P NBFC will not take any credit risk on there balance sheet. It also further explained that any loss of principal/ Interest or both is between the borrower [Peer who is borrowing] & lender [ Peer who is lending].Adequate disclosures to this effect shall be made to lenders [Peer] as part of fair practices code. It will increase and expose the actual risk to the lenders [Peer] on the platform and expected lending may go down due to this
2. An NBFC-P2P shall not cross sell any product except for loan specific insurance products - Further Point 1 is extended in this point as well by mentioning clearly that “NBFC-P2P shall not cross sell any insurance product also which is in the nature of credit enhancement or credit guarantee”
3. While this point is being followed by many of the platform on Aggregate Exposure - However RBI emphasised this further by stating that the aggregate exposure of a lender to all borrowers at any point of time, across all P2P platforms, shall be subject to a cap of Rs.50,00,000 provided that the amount lent by the lenders on P2P platforms is consistent with their net-worth. In case, the amount lent by a lender is more than Rs.10,00,000 across P2P platforms, the lender shall produce a certificate to P2P platforms from a practicing Chartered Accountant certifying minimum net-worth of Rs.50,00,000
4. Lender Matching Algorithm approved by Board - Rules for mapping lenders to borrowers should be set in equitable and non-discriminatory manner , This become very important and need to be transparently clarified to the peer lender so that they are fully aware about the credit risk involved in dolling out the money to the borrowers. Generally its assumed that borrowers on this P2P Platforms are relatively high on cash hungriness and in turn very high risk customers
5. No loan shall be disbursed unless the individual lender/s have approved the individual recipient/s of the loan and all concerned participants have signed the loan contract.
6. Fund Transfer for Disbursement & Repayment - RBI clarifies that two separate escrow needs to be maintained [ One for Disbursement from Peer Lender to Borrower and Other for repayment from Borrower to Peer Lender] .

7. Increasing visibility to Peer Lender about borrowers profile - Details about the borrower(s) including personal identity with his/ her consent (which should be kept on record), required amount, interest rate sought and credit score as arrived by the NBFC-P2P

8. P2P NBFC Public Disclosure on Portfolio & NPA's - Portfolio performance including share of non-performing assets (NPAs) on a monthly basis and segregation by Vintage.Such disclosures shall also include all losses borne by the lenders on principal or interest or both.

9. P2P platform does not assured return of principal/payment of interest. The declaration shall also state that there exists a likelihood of loss of entire principal in case of default by a borrower. The P2P platform shall not provide any assurance or guarantee for the recovery of loans. Further, the P2P platform shall not promote peer to peer lending as an investment product with features like tenure linked assured minimum returns, liquidity options, etc

10. Outsourcing Norms for P2P NBFC - Not to outsource core management functions including Internal Audit, Strategic and Compliance functions, pricing of services/ fees to be charged to borrowers/ lenders and decision-making functions such as determining compliance with KYC norms

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