On 4 October 2017, the Reserve Bank of India issued directions to regulate the definition and operations of non-banking finance companies engaged in peer-to-peer lending. However, the central bank has offered little explanation regarding the object of the notification and the scope of regulating P2P platforms.
In 2016, it issued a consultation paper on regulating crowdfunding in India, as is the case in other countries, whether by way of debt and/or equity or otherwise. It seems regulators and legislators are still in the process of finding the appropriate way forward to regulate crowdfunding. This is evident from the fact that the RBI took more than a year to notify and issue the P2P directions. The central bank deems P2P lending a form of crowdfunding.
For the sake of brevity, below are summarised certain key issues of the P2P directions after taking into consideration various arguments in the central bank’s consultation paper:
1. P2P entities as NBFCs
The entities engaged in the business of P2P lending, even before the directions were issued, are primarily technology entities, which means they do not use their own funds to lend. These technology companies operate as marketplaces to facilitate loans between lenders and borrowers. Their principal business is to provide their platform as marketplaces and their primary source of income is the platform/technology fee.
Can such technology entities be deemed financial institutions within the purview of the Reserve Bank of India Act, 1934? If no, can these entities be regulated as NBFCs?
2. Ambiguous definition of P2P lending
In the RBI’s notification dated 24 August 2017, the regulator defined a P2P lending platform as, “the business of providing under a contract, the service of loan facilitation, via online medium or otherwise, to the participants who have entered into an arrangement with that platform to lend on it or to avail of loan facilitation services provided by it.”
The term “or otherwise” in the definition does not clarify whether P2P lending is restricted only to online platforms. It could potentially include even direct selling associations and similar offline businesses that have their own websites. However, the RBI will have to issue a clarification to resolve this ambiguity.
3. Net-owned fund and leverage ratio
The RBI in its directions stated that any NBFC-P2P platform needs to have net-owned funds of more than Rs 2 crore or as is prescribed by the central bank. They are also required to have a leverage ratio not exceeding 2. However, an analysis of the business activities of most existing NBFC-P2Ps show that technology (at the initial stage) and human capital (basically salaries and other remunerations) are the only major expenditures. These businesses do not require heavy funding as they are not capital intensive.
4. Limit on lending
The RBI’s consultation paper on P2P lending stated that borrowers can avail of low rates and lenders can enjoy higher returns as compared to convention investment opportunities. The paper does not mention any cap on the lending amount.
However, the P2P directions state that loans are subject to a cap of Rs 10,00,000. Introducing such a cap would significantly reduce the number and/or quantum of the transactions through P2P. The RBI too in this instance has not provided any explanation or clarification for introducing this cap.
5. Exempting non-institutional lenders from regulation
The P2P directions apply to all categories of lenders and do not distinguish between institutional and non-institutional entities.
Non-institutional lenders are governed by a money lenders act, which differs from state to state. Because this law is already in force at the state level, the need for central-level legislation may be unnecessary.
RBI may exempt P2P entities that facilitate loans from non-institutional lenders from any kind of regulation.
6. Are NBFC-P2Ps intermediaries for banks?
The RBI’s stringent provisions under the P2P directions are fully justified and viable if NBFC-P2Ps are to serve as support systems for banks. For banks that have online operations, such regulations are a must as they have to observe several compliances and restrictions.
Conclusion
Although the P2P directions are stringent, the regulations may be watered down in due course. The RBI may grant NBFC-P2Ps extensions to comply with or exempt them from all or any of the provisions of the directions.
The entities could have some respite from the rules when fraudulent or quasi-P2P entities, which operated before the directions were introduced, are shut down.
It is about time that crowdfunding activities are governed by balanced regulations.
Rishabh Mastaram is founder of Mumbai-based law firm RGM Legal. Views expressed here are personal and do not reflect that of the firm.