It is the practice of lending money to individuals or businesses through an online service that matches lenders with borrowers. P2P is a form of crowdfunding used to raise a loan which is paid back with interest. It is the method of debt financing that enables individuals to borrow and lend money without the use of an intermediary, it removes the middleman.

It can be also called cloud funding under which lenders lend to the borrower online, under this lenders are free to choose whom to lend and can diversify their options among different borrowers. One of the main advantages of P2P lending for borrowers has been lower rates than those offered by money lenders/unorganized sector and the advantages for lenders are higher returns than what conventional investment opportunities offer.

P2P lending platforms are largely tech companies registered under the Companies Act and acting as an aggregator for lenders and borrowers thereby, helping create a match between them. Once the borrowers and lenders register themselves on the website, due diligence is carried out by the platform and those found acceptable are allowed to participate in lending/borrowing activity. In most cases, the platform moderates the interaction between the borrower and the lender. The documentation for the lending and borrowing arrangement is facilitated by the P2P platform. The lender transfers money from his/her bank account to the borrower’s bank account.

As per the consultation paper, RBI has the power to regulate entities which are in the form of companies or cooperative societies. These companies shall be required to obtain a P2P lending license from RBI.

The  Regulatory framework may aim to cover the following aspects of P2P lending:

• Permitted Activity– the role of the platform will be that of an intermediary, bringing the borrower and lender together in a way that non-compliance with section 45 S of the RBI Act relating to the “deposits” is not being attracted by any of its activities.
• Prudential Norms– A minimum capital of INR 2 Crores shall be required for a P2P lending platform to get registered as an intermediary with the RBI.
• Governance Requirements– There shall be fit and proper guidelines for the conduct of promoters, directors, and CEO. Proposed Guidelines will also require the business to hold a physical place in India.
• Continuation of the business-The guidelines shall also provide provisions for alternative arrangements in case of the failure of the business.
• Customer Interface– While providing credit scoring for the proposed borrowers, the platform shall seek to maintain the confidentiality of the information provided by the customers.
• Reporting Requirements– Regular reports in respect of financial position, loans, and complaints are submitted to the RBI by all the P2P lending platforms.

The process to Get a Peer Peer Lending License with RBI

•  Incorporation of a Company with a minimum Net Owned Fund of Rs. 2 crores
•  Apply for a Certificate of Registration/License to RBI online and submit a physical copy of the application along with the necessary documents to the Regional Office of the Reserve Bank of India
• Acceptance of Certificate: After the application is filed, the same is examined by RBI and further documents and clarifications may be sought from time to time. Finally, if RBI considers that the application is complete in all respects and all required documents and information is furnished to its satisfaction, it may grant Certificate of Registration to carry on the business.
• Choose a domain name that is easy for potential customers to remember.
• Set up  P2P lending software.
•  Attract customers by way of advertisement.

Do’s & Don’ts of Peer-to-Peer Lending Business

       Do’s

• The lender transfers money directly from his/her bank account to the borrower’s bank account to obviate the threat of money laundering.
• The current regulations applicable to other NBFCs will be made applicable to the P2P platforms in regard to recovery practice.
• The operators to have a proper grievance redress mechanism to deal with complaints from both lenders and borrowers and require reporting to the Board.
• To include fit and proper criteria for promoters, directors, and CEO including a reasonable proportion of board members having financial sector background.
• Put in place adequate risk management systems.
• To submit regular reports on their financial position, loans arranged each quarter, complaints etc. to the Reserve Bank.

           Don’ts

• Prohibit the platforms from being used for any cross-border transaction relating to residents and non-residents.
• P2P lending platforms may be prohibited from promising or suggesting a promise of extraordinary returns, which implies some form of guarantee of returns to lenders.

Some of the P2P Lending Platforms in India

• Lendbox
• Faircent
• I-lend
• Easy Rupiya
• LenDen Club