P2P Lending is a new concept in debt financing. It enables a person to take a loan or invest money in lending, without any interactions whatsoever with a financial institution such as a bank.
Recession in 2008 saw popularity of the P2P lending companies, both for borrowing and lending. As banks started to refuse increased loan portfolios, small businesses were on the lookout for resources, somewhere else.
P2P lending emerged as another way for the common people and the small businesses, to find themselves a credit lender- offering a higher rate of return on investments.
But, people are hesitant to use the platform, with the absence of a regulated environment. RBI has recently issued a notification to this effect in October 2017. All the NBFC-P2P Companies will comply to these directions from RBI.
In this article, we will highlight some of the impacts that the RBI notification will have in the P2P lending space:
Impact# 1: Framework on Registration
The P2P lending companies were so far recognized by the Companies Act. RBI issued directions on a framework on registration and operations of NBFC-P2P companies in India. RBI stipulates that the general character of the management of the company will not be prejudicial of public interest.
For this, RBI speaks about a Certificate of Registration (CoR) from RBI, that will be necessary to carry out the business of these NBFC-P2P companies, which will serve public interest. Registration can only be granted by RBI to those NBFC-P2P companies, who have a net owned fund of 20 million or any other higher amount, as specified by the bank.
Impact# 2: Prudential Requirements
The P2P platform must not expand indiscriminately. To keep a control on this, RBI has prescribed a leverage ratio not exceeding 2. Furthermore, lending practices are usually resorted by all those uninformed lenders, who seek higher returns only.
In other words, RBI has imposed a cap on the maximum contribution that the lender can make towards a loan. A single lender to the same borrower must not be exposed to an amount more than Rs 50,000 as stated by RBI. There is a cap of Rs 10,00,000, as the aggregate exposure of a lender to several borrowers, across all P2P companies and at the same point in time.
Impact# 3: Higher Quality of Credit
At present, the P2P lending companies do not have the resources that are available to the banks. So, the onus of credit-worthiness of the borrowers rested on them. It was not easy for the P2P lending companies to ascertain the quality of credit.
The reason behind this is that the credit bureaus do not have access to all the borrowers, across the length and breadth of the country. The result was higher delinquencies and fraud. So, when RBI acts as the supervisory body, they will have more details on disbursed loans and the accounts that dishonored them. This will raise the quality of credit.
Impact# 4: Legal Accountability
The lending companies so far were withholding information on their borrowers- – the individuals and the businesses. The P2P lending platforms will now onwards submit reports on their financial positions, on a regular basis to the bank.
Moreover, there will be quarterly reports on loans as well as complaints, which were outstanding or those which got disposed, during a quarterly period.
In extreme situation, when the company fails to be diligent to submit the above reports, RBI may impose penalties or even take away the business license.
We conclude, by saying that the regulatory regime of RBI will have a positive impact on the credibility to the P2P sector.
It was rightly said by Ralph Waldo Emerson– “Every Wall is a Door”
Thus, take a step forward to open the door for the new FDI norms.
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