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The Master Directions – Non-Banking Financial Company – Peer to Peer Lending (Reserve Bank) Directions, 2017 (Directions) are 22-page long, and contain 20 sections and 5 annexes.
Fund transfer Mechanism
While section 9 makes a brief reference to the transfer of funds between borrowers and lenders, Annexure 1, by the means of a flowchart, illustrates the funds transfer mechanism applicable to P2P platforms.
It is essentially a tri-partite arrangement which includes the lender, the borrower and the trust. The function of the trust(ee) is to ‘operate’ two escrow accounts (which are maintained with a Bank), one where the Lender will transfer the funds for lending to a specified borrower and another one, where the borrower will make all its repayments, from where the money will be transferred to the specific lender.
Whereas, the platform will merely serve as an intermediary that will undertake the listing of lenders and borrowers, and act as a market place for exchange of information between the trustee, lender and borrowers.
According to Rajat Gandhi Founder & CEO, Faircent.com,
“The announcement is also a validation of our business model and best practices, which have helped us in consolidating our leadership position. We have been following the ESCROW mechanism, recommended by RBI with separate ESCROW accounts for lenders and borrowers through a trustee like IDBI to ensure that there is no risk-exposure on our balance sheets. We have never lent from our books and do not provide any guarantee schemes or assure returns through principal protection.”
The main provisions of the Directions at the outset provides for the eligibility criteria for being registered as a P2P Platform, with the minimum ‘net owned funds’ requirement kept at INR 20 million.
Thereafter in the process for registration as an NBFC P2P, the RBI has listed some subjective criterion such as “the general character of the management of the company is not prejudicial to public interest” and the company has “adequate capital structure” to undertake this business.
Disclosure requirements have been mandated on the platform; disclosures to the lenders, borrowers and public. The platform is also required to become a member of the Credit Information Companies and submit data to them periodically.
The Directions further limit the scope of activities of a P2P platform and provide for prudential norms. Platforms are also required to obtain prior permission of RBI if an individual or group wishes to obtain 26% or more of the paid up-capital of the platform.
Other instances of prior approval, inter alia, pertain to takeover/ acquisition of control over the P2P, change in management which would result in change more than “30%” of the Directors (excluding independent directors). In case of change in control/management, a public notice of at least 30 days is also required, after the RBI’s permission is granted.
The Platform is also required to establish an internal mechanism to deal with grievances/complaints from participants. While the grievance redressal officer is required to resolve the dispute within one month, failure to do so allows an appeal to the Customer Education and Protection Department of the RBI.
“The resolution is an extremely positive step for the P2P lending business, and we are confident that the guidelines will help the sector in realising its immense potential.”
One crucial element which seems to be missing though is clarity on how the rate of interest charged to the borrower will be calculated. The Directions simply make a reference to the interest in the disclosure requirements and require the rates to be displayed in an Annualised Percentage Format.
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