Discussion Paper On Regulating Crowd-Funding & Peer-To-Peer Lending, Know What It Is All About

The Reserve Bank of India (RBI) last week came out with a discussion paper to regulate the nascent but fast-growing crowd-funding and peer-to-peer (P2P) lending. There are around 30 P2P lending companies in India. Some of the well-known ones are Milaap, Ketto, Kiva, Lendbox, Loanmeet.

What is peer-to-peer (P2P) lending?
P2P lending allows an individual to lend (or borrow) money to (or from) other unrelated individual(s) without assistance from any financial intermediary like a bank, etc. This is primarily done via an online platform that connects lenders with borrowers.

What are the advantages of P2P lending?
People who may not be eligible to get loans from banks/non-banking financial companies (NBFCs) can take loans. So, people can count on these platforms if they don’t have a good credit history or are a first-time borrower. It can also allow customers to become lenders and earn interest. Also, for loans of small sizes where banks might not be very forthcoming in sanctioning small amount loans because of the cost incurred. However, it comes with risks.

What are the disadvantages?
Interest rates are higher than what a bank/NBFC may charge. Currently, it is not regulated so consumers can not approach anyone in case of distress Also, beyond the companies, there are no grievance redressal systems in place.

What are RBI’s proposals?

• The platform should be registered as Intermediary Non-Banking Financial Company (NBFC) so that it can be regulated by RBI. [NBFC is a company engaged in the business of loans and advances].
  Currently, the platforms are registered as technology companies and run by individuals, proprietorship, partnership or limited liability partnerships — areas outside RBI’s jurisdiction.
• Minimum capital of 2 crores to ensure enough skin in the game at a later date
• The platform should not take the deposit, thus, it cannot show lending and borrower funds on its balance sheet. However, it can demand fees.
• Funds raised should go directly from the lender’s bank account to the borrower’s to avoid the threat of money laundering.
• Should not provide cross-border transactions
• Platform will be prohibited from giving any direct or indirect assured return. However, it can provide opinion on suitability of a lender and creditworthiness of a borrower
• Some of the board members should have financial background for sustainability
• The management should be stationed in India and should have a brick-and-mortar place of business in India

The Logical Indian views this as a potential sector for financial inclusion and easy credit availability. The RBI has come up with the intent to regulate it at the right time. The smooth functioning of such sectors goes a long way in the quick and legitimate flow of money in the economy.