The Reserve Bank of India (RBI) recently notified that non-banking institutions operating as peer-to-peer (P2P) lending platforms are to be treated as non-banking financial companies (NBFCs).
According to the RBI’s notification, a P2P lending platform shall, under a contract, provide loan facilitation services via an online medium or otherwise to participants who have entered into an arrangement with that platform.
RBI’s definition of an NBFC
A company is deemed an NBFC if it offers financial services such as loans and advances, acquisition of marketable securities, leasing, hire-purchase, and insurance and chit businesses. Besides, the firm’s financial assets and income from such assets must constitute more than 50% of total assets and the gross income, respectively, to be considered an NBFC.
This is popularly known as the 50-50 test and is applied to determine whether a company offers financial services. Any company that satisfies the criteria of the test will need to get certified as an NBFC from the RBI and will have to adhere to the minimum net-owned fund requirements and prudential norms.
The RBI had formulated the 50-50 test to ensure that companies predominantly engaged only in financial activities get registered as NBFCs. The RBI’s intent is not to regulate companies principally engaged in agricultural operations and industrial activity, or those that buy and sell goods, services or immovable property, even if such companies offer financial services in a small way.
P2P lending
While the RBI’s notification states that P2P lending platforms will be regarded as NBFCs, there is no specific mention or clarification around the applicability of the 50-50 test.
By logic, the test should be applied to determine whether P2P lending constitutes the principal business activity of a company.
E-commerce and other companies as an extension of their principal business activities may provide loan facilitation to their customers, for instance, in the form of equated monthly instalments and credit options.
These incidental offerings may technically fall within the purview of P2P loan facilitation activity. A formal clarification is warranted from the RBI as to whether the 50-50 test is applicable in such cases so as to avoid tagging such companies as NBFCs.
Varun Sriram is a Partner with law firm J Sagar Associates. Views expressed are personal.