RBI tweaks norms for NBFC-P2P lending platforms to improve transparency, compliance

In a bid to improve transparency, compliance the lending process further, the Reserve Bank of India (RBI) has reset norms for Non Banking Financial Company-Peer to Peer Lending Platforms (NBFC-P2P Lending Platform). The step has been initiated to take action in light of certain practices conducted by a few Peer-to-Peer (P2P) platforms that have been found to breach current regulatory guidelines. This has necessitated the implementation of more stringent oversight and enhanced transparency measures.

Peer-to-peer (P2P) platforms, as per the Reserve Bank of India (RBI), are restricted from cross-selling insurance products that serve as credit enhancement or credit guarantees. Furthermore, they are prohibited from positioning peer to peer lending as an investment opportunity and are required to provide transparent disclosures regarding any losses incurred by lenders on either principal or interest, or both.

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As outlined in the updated master direction released by the Reserve Bank of India (RBI), it is imperative that any Peer-to-Peer (P2P) platform refrains from marketing peer-to-peer lending as an investment tool with attributes such as guaranteed minimum returns tied to tenure, liquidity alternatives, and the like.

Moreover, NBFC-P2P Lending Platforms are instructed against engaging in the cross-selling of any insurance products resembling credit enhancement or credit guarantee mechanisms.

Furthermore, the directive specifies that no lending activity shall be initiated unless a precise alignment between lenders and borrowers is established in accordance with a policy endorsed by the board.

"Such practices include, among others, violation of the prescribed funds transfer mechanism, promoting peer-to-peer lending as an investment product with features like tenure linked assured minimum returns, providing liquidity options and at times acting like deposit takers and lenders instead of being a platform," the RBI said in its master direction.

Additionally, the RBI mandates that these platforms cannot use funds from one lender to substitute another.

The central bank has highlighted various troubling trends within peer-to-peer (P2P) platforms in its most recent report. A number of platforms were identified for breaching designated funds transfer protocols, whereas some have been observed marketing P2P lending as an investment vehicle offering guaranteed returns tied to tenure, a practice that goes against the intended purpose of such platforms.

The RBI noted that certain P2P platforms were providing liquidity options and at times operating similarly to deposit takers or lenders, rather than as intermediaries facilitating lending between peers.

Key changes introduced:

> Non-banking financial companies (NBFCs) that operate as peer-to-peer lending platforms (P2Ps) are currently prohibited from offering or facilitating credit enhancement or guarantee services. This prohibition aims to shield these platforms from bearing any credit risks linked to transactions conducted on their platforms.

> Furthermore, the Reserve Bank of India (RBI) has imposed limitations on NBFC-P2Ps, barring them from cross-selling various products, except for insurance products directly related to loans. This directive is designed to uphold the platforms' concentration on their primary function.

> The central bank also implemented regulations setting a cap on the total exposure of a lender to all borrowers through peer-to-peer (P2P) platforms, restricting it to Rs 50 lakh. 

> This restriction aims to align the lending activities of lenders with their financial capabilities. Lenders extending loans exceeding Rs 10 lakh across P2P platforms are now obligated to furnish a certificate from a Chartered Accountant verifying a minimum net worth of Rs 50 lakh.

> The banking regulator has made it a requirement that loan disbursement may only take place after a thorough matching process between lenders and borrowers as per the policy approved by the board. Additionally, all financial transactions between parties on a peer-to-peer platform must be processed through an escrow account managed by a trustee supported by a bank.

> In order to promote transparency, Non-Banking Financial Company Peer-to-Peer (NBFC-P2P) entities are now obligated to make publicly available their portfolio performance data, which includes information on non-performing assets (NPAs), on a monthly basis.

“The new RBI guidelines are positive for the industry and in the best interest of lenders and borrowers. We welcome these guidelines, which give crystal clear direction and set the roadmap for P2P Lending 2.0. As one of the oldest players we strongly believe this will strengthen the industry in the long run. Our platform will work diligently to align our product / technology with the latest RBI guidelines as it has been doing so far,” said Bhavin Patel, Founder & CEO, LenDenClub.