Overview Peer to Peer Lending License

The term P2P (Peer to Peer) basically denotes an online platform or portal that works as an intermediary between the lenders and borrowers. To start a P2P Lending Business in India, one needs to acquire a Peer to Peer Lending License from the Reserve Bank of India. Further, the borrower of a Peer to Peer (P2P) can be both a lawful business entity and an individual.

Nowadays, entrepreneurs and start-ups tend to choose Peer to Peer Lending for the growth in their initial days, as it assists them in growing them that, too, without obtaining money from any person. Therefore, it has become one of the most comfortable and primary choice for everyone who are looking for the venture funding.

Concept of Peer to Peer Lending

The concept of Peer to Peer Lending means a process of lending out an amount of money to the people or business houses by way of online services, which assist match between the lenders and borrowers. Also, the process of P2P lending is mostly carried out online.

Further, Peer to Peer Lending is a mode of debt financing which permits the individuals to lend & borrow money without the actual participation and involvement of a financial institution as an intermediary. That means the process of Peer to Peer Lending removes the intermediary from the lending and both the borrower and the lender save on the charges that are charged by the intermediary. The only authority to issue a Peer to Peer Lending License is with the Reserve Bank of India.

Benefits of Peer to Peer Lending License

The benefits of Peer to Peer Lending License are as follows:

• Application for the Procedure of obtaining Peer to Peer Lending License can be filed online;
• P2P Lending is a Fast and Convenient mode of Lending and Borrowing money;
• People are able to access loans at lower interest rates;
• Getting an Initial Quote will not have any impact on the credit score;
• Acts as an alternative option for providing loan to traditional lenders;
• Loans given by the Peer to Peer Lending Platforms are more flexible in nature than Traditional Loans;
• P2P Digital Platforms matches the borrowers with the appropriate Lenders;

Basic Characteristics of Peer to Peer Lending License

The basic characteristics of P2P Digital Lending Platforms are as follows:

• Peer to Peer Lending Platforms are the online portals that matches the borrower with suitable lenders;
• There is no necessity of having a prior relationship between the lender and borrower;
• Peer to Peer Lending Platforms do not have any involvement and engagement of a financial institution operating as an intermediary between the lender and borrower;
• It shall be noted that all the lender and the borrowers are free and able to make their decision concerning the choice of borrowing and investment, respectively;

Operations of Peer to Peer Digital Lending Platform

The operation of a Peer to Peer Digital Lending Platform can be summarised as:

• The particular party, whether it’s the borrower or the lender needs to get itself registered on the online Peer to Peer lending portal. The same can be done by furnishing the information asked by the P2P Lending Company;
• Further, the respective Peer to Peer Lending Platform will conduct the process of Due Diligence after registration;
• After that, the parties who have received a positive report post the process of Due Diligence will now need to get approval in order to create their main profile on the portal. By this way, they will be able to reach to other parties, interact with them to make the loan deal based on mutual agreement.
• Now, the loans offered by the Peer to Peer Lending Business can be both secured and unsecured and are mostly of that nature which does not come under the ambit of government insurance;
• Also, it shall be noted that Peer to Peer Lending platforms can easily provide the facility of loan transfer, such as securities for the objective of earning profit or debt collection;

Eligibility Criteria to Start Peer to Peer Digital Lending Platform in India

The Eligibility Criteria to obtain Peer to Peer Lending License in India can be summarised as:

• A company that wishes to acquire Peer to Peer Lending License in India needs to first obtain a Certificate of Registration under the provisions of the Companies Act 2013;
• A company that wishes to acquire a P2P Lending License in India must have the NOF (Net Owned Funds) of at least Rs 2 crores;
• If in case a Company or a business entity was already running such type of business before the obtaining of Certificate of Registration was made mandatory, then, in that case, such type of Company will fulfil all the conditions prescribed and laid down by the Reserve Bank of India;

Conditions to Start Peer to Peer Digital Lending Platform in India

The basic conditions to start Peer to Peer Lending Digital Platform in India can be summarised as follows:

• The company must be incorporated and registered in India;
• The company must have all the required entrepreneurial, managerial, and technological resources. The same is required to offer the Peer to Peer digital lending services to the participants;
• The company must have the suitable amount as the capital structure to run a Peer to Peer Digital Lending Platform;
• All the proposed Directors and Promoters must be proper and fit;
• The general character of the company’s management must not be detrimental towards the interest of the general public;
• The said company must submit a plan for the implementation of a secured and safe Information Technology Mechanism; if in case the same has not been duly implemented already;
• The applicant company requires to submit a feasible business plan in order to run a Peer to Peer Digital Lending Portal;
• If in case the Company is issued the Certificate of Registration (COR), then, in that case, the public interest would be served;
• Any other such type of condition, as may be timely notified by the Reserve Bank of India, which guarantees that starting or running of such business in India will not be detrimental to the interest of the general public;

For Companies

• If a new private limited company seeks for the Certificate of Registration (COR) and fulfils all the specified conditions as mentioned above, then, in that case, the RBI will grant it in principle approvalto establish a Peer to Peer Digital Lending platform, upon the fulfilment of such other conditions as the Reserve Bank of India may deem fit;
• The in principle approval stands valid for a tenure of twelve months, starting from the date on which it is granted to it;
• In the tenure of twelve months, the said applicant company will be needed to establish its technology mechanism. The same is done to perform all the process of needed legal documentation and will report all the compliances that were mandated to be made to the Reserve Bank of India;
• If in case the Apex Bank is satisfied that the applicant company is all set to commence the operations and affairs of the Peer to Peer Lending, then, in that case, it will grant the Certificate of Registration (COR), subject to the fulfilment of such situations, as it may deem fit;

Permitted Activities of Peer to Peer Digital Lending Platform in India

The activities permitted by the Peer to Peer Digital Lending Platforms in India are as follows:

• To offer an online platform to all the participants that are involved in the process of Peer to Peer Lending, thereby the same acts as their intermediary.
• A Peer to Peer Lending Business is allowed to raise deposits neither under the provisions of the Companies Act 2013 nor under section 45 I (bb) of the RBI Act;
• They are not allowed to lend money to their own;
• They are not allowed to provide or arrange any credit enhancement or credit guarantee;
• A Peer to Peer Lending Digital Platform is not allowed to facilitate or permit any secured and safe lending that is associated to their online platform. Further, the permission of lending is only given for clean loans;
• They are not allowed to hold any of the funds that are collected from the lenders (for the purpose of lending) or from the borrowers (for the purpose of servicing loans) in their own annual balance sheet;
• P2P Digital Lending Companies are not permitted to sell any product or item except the loan provided insurance products;
• A P2P Digital Lending Platform is not permitted to have an international flow of funds;
• A P2P Lending Company is required to adhere to all the legal necessities that are applicable to the engaged participants under the pertinent applicable laws;
• It is compulsory for all the Peer to Peer Lending Companies to store & process the entire data concerning to its activities & participants on hardware that is situated within India;

Responsibilities of Peer to Peer Digital Lending Platform in India

The responsibilities of the Peer to Peer Digital Lending Platforms in India are as follows:

• Undertaking the process of due diligence on its proposed participants before approving them as participants on the P2P platform;
• Carrying out the risk profiling & credit assessment of the listed borrowers & disclosing the same to the registered lenders;
• Necessitating explicit & prior consent of the participants to have access to its credit information;
• Carrying out the process of documentation of the loan agreements & other pertinent documents;
• Rendering assistance in repayments & disbursement of the loan amount;
• Offering services concerning the loan recovery of the loans that are originated on the platform;

Fund Transfer Mechanism for Peer to Peer Digital Lending Platform in India

The funds transfer mechanism for obtaining peer to peer lending license in India can be summarised as:

• On Peer to Peer Digital Lending platforms, the funds are transferred between the participants through Escrow Account Mechanism, which will be operated and carried out by a Trustee;
• A minimum of two Escrow accounts are needed to be maintained for the funds transfer mechanism. Firstly, for receiving the amount pending for disbursal from the lenders and the other one for borrowers;
• All the transactions and dealings will be carried out only through bank accounts. That means cash transactions are completely and totally prohibited;

Procedure for obtaining Peer to Peer Lending License

The steps involved in the process for obtaining Peer to Peer Lending License in India can be summarised as:

• The applicant company must be registered in India either as a Private Limited Company or as a Public Limited Company that, too, with the principal agenda of financing;
• The minimum NOF (Net Owned Funds) required for obtaining Peer to Peer Lending License is of Rs 2 crores;
• Now, in the next step, submit the work flow for the main Website and Mobile Application;
• After that, the applicant company needs to file an online application, which is available on the RBI's website named COSMOS;
• Now, the applicant company needs to submit the hard copy of the application drafted, together with the attached documents at the regional office of the Reserve Bank of India Office.
• Lastly, the Peer to Peer Lending License will be issued by the apex bank only after carrying out a vigilant inspection of the submitted application and the documents attached with it;

Difference Between Crowdfunding and Peer to Peer Lending

In India, the concept of Peer to Peer digital lending is a type of crowd-funding, under which the loans are raised & paid back with a fixed interest. Further, Peer to Peer Lending Platform works as an online platform on which the lenders & borrowers register themselves in order to raise the unsecured loans. Further, under this mechanism, the borrower will either be an individual or a legal business entity.