P2P Lending
Imagine! You devise a wonderful business plan and now you need money to transform your plan into reality. To procure funds, you contact numerous lenders and banks, but sadly, nothing works. You even try to convince angel investors but they too refuse your proposal. Consequently, your dream to build a money-making business makes its way to a trash can. That’s a story of thousands of entrepreneurs and aspiring business minds who fail to take the first stride because of capital procurement issues. Truth be told, procuring capital in India is overwhelming and attracts numerous pain points such as rigorous vetting, stringent bureaucratic procedures, red tapism, etc.
This can be a daunting issue for those seeking instance funds to stay ahead of the curve. That is where the concept of P2P comes into play. It provides an online way of procuring and lending funds with minimal paperwork and inspection- ensuring peace of mind for either party involved in the transaction. Let’s understand what is P2P platform, how it works, and its establishment legalities.
Underscoring pathbreaking features of P2P lending platform
- P2P embraces cutting-edge AI and ML technologies to facilitate online lending and borrowing. It requires Reserve Bank approval to operate. These platforms require lenders and borrowers get registered by providing KYC documents. Post-registration, either party becomes eligible to transact.
- P2P overcomes potential risks such as payment default, fraudulent lending, etc by reinforcing razor-sharp vetting and transparency. Post registration, the lenders’ and borrowers’ profiles undergo stringent scrutiny for legitimacy and trustworthiness.
- P2P keeps almost every aspect of creditors and borrowers transparent, ensuring credibility and level field play. Lenders have access to borrower’s details like credit score, credit history, purpose of loan, etc. Likewise, borrowers can dig into various lenders’ details such as disbursement history, customer profiles, success rate, etc, enabling informed decision-making.
- Most P2P lending platforms allow investors to fetch an interest rate ranging from 12-15%, the highest among all lenders.
- P2P platforms effectively curtail instances like illicit borrowing by keeping untrustworthy creditors at bay.
- The platform can diversify the funding portfolio based on the demand. For example, if you wish to lend around 1 lacs as a loan, the platform can bifurcate this into two loans each worth Rs 50000 with no impact on interest rate.
Obligations for P2P Lenders in India
- P2P platforms in India must have RBI’s approval before coming into action.
- Before onboarding the potential investors and borrowers, the P2P platform must conduct comprehensive due diligence.
- Every listed borrower must undergo risk profiling and credit assessments. Their details should remain transparent to registered lenders.
- The profile details and credit information are not available to unauthorized persons.
- The platform must devise loan paperwork and agreements without impacting their legal gravity.
- The platform must assist lenders to recover their disbursed corpus from creditors.
- Mutual lending of funds among onboarded lenders is not permitted.
- The platform cannot make false promises like assured returns to borrowers.
- The platform’s annual lending sheet should not reflect lenders’ or borrowers’s funds directly or indirectly.
- Unless mentioned otherwise, the cross-border transaction of funds should stay at a halt on Indian-led P2P platforms.
- The platform should maintain a robust database for storing and processing users’ data.
Eligibility and Legalities for Securing a P2P Lending License in India
The section below illustrates the legalities of securing a P2P lending license in India:
- The applicant company must be a registered one, preferably under the legislation viz. Companies Act 2013.
- The company’s object, according to the MoA, should adhere to serving primary business objectives only.
- A minimum NoF i.e. Net Owned Funds amounting to Rs 2 crores is mandatory to register a P2P lending firm.
- Devise and share the workflow depicting the portal’s workflow (whether omnichannel or not) with the authority.
- The applicant firm must file an online application form on the RBI’s COSMOS website. Besides, the company should share a physical version of the documents and application with the RBI’s regional office.
Note: RBI shall thoroughly vet the documents for accuracy and legitimacy within the purview of their guidelines. Therefore, exercise caution while drafting documents and understanding compliances.
Conclusion
With India becoming increasingly digitized on all fronts, including banking and finances, the P2P platform has emerged as a viable source of investing and securing credit with minimal legalities. Those seeking to launch such a platform must abide by the Reserve Bank’s norms without fail.
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