Introduction
Non-banking Financial Company peer-to-peer lending platforms (‘NBFC-P2P’) provide a marketplace for persons to borrow and lend short-term loans. The Reserve Bank of India (‘RBI’) issued a master direction[i] in 2017 to regulate such NBFC-P2P. The RBI observed that these platforms were engaging in certain violative practices and, therefore, decided to amend the master directions suitably to enhance clarity and transparency for the lenders and borrowers.
The amendments to the master direction were issued vide a notification dated 16.08.2024[ii], in which certain existing conditions of the master directions were modified, and certain new conditions were incorporated into them.
Changes to existing conditions
The master direction earlier stipulated that NBFC-P2P shall not provide or arrange any credit enhancement or credit guarantee. It has now been provided that NBFC-P2P shall not bear any credit risk, directly or indirectly. It has been clarified that the lenders shall only bear the loss of principal and interest.
The master direction earlier provided that cross-selling is not permitted except for loan-specific insurance products. It has now been provided that NBFC-P2P shall not cross-sell insurance products that are in the nature of credit enhancement or credit guarantee.
The NBFC-P2P was mandated to have a board-approved policy setting out the rules for matching lenders with borrowers. The policy now also sets out rules for mapping lenders and borrowers. It has been further provided that no loans shall be disbursed unless the lenders and borrowers are matched/mapped as per the board-approved policy.
The fund transfer mechanism earlier provided that NBFC-P2P shall maintain at least two escrow accounts, i.e., one for funds received from the lenders and one for repayment of loans by the borrowers, both of which were to be operated by a trustee. It has now been provided that the funds received from a lender shall only be used for disbursal to the specific borrower’s account, and funds received from a borrower shall only be transferred to the respective lender's account.
Importantly, it has now been stipulated that funds from the lender's escrow account shall not be used for loan repayments, and funds from the borrower’s escrow account shall not be used for loan disbursals.
Furthermore, it has been specified that funds in the borrower’s and lender’s escrow accounts must not remain for a period exceeding T+1 days.
The NBFC-P2P was earlier required to disclose the borrower's personal details with the lender. It has now been provided that consent of the borrower is required before sharing the details with the lender.
The NBFC-P2P was required to disclose certain details regarding NPAs on their website. It has now been provided that the disclosure shall also include all losses incurred by lenders on principal and interest.
The NBFC-P2P are now barred from promoting peer-to-peer lending as an investment product.
Earlier, the master direction stated that the NBFC-P2P could outsource any financial service functions except core management functions. The word ‘financial’ has been omitted, and the NBFC-P2P can now outsource any function except core management functions.
Newly introduced conditions
The lender’s funds shall not be utilised in any manner other than as provided in the directions. Further, it has now been provided that NBFC-P2P shall not utilise the lender’s funds to pay back another lender.
The NBFC-P2P will have to disclose the fees liable to be charged at the time of lending. This fee shall be a fixed amount or a fixed percentage of the principal amount and will not depend on the borrower's repayment.
The practice of matching/mapping participants within a closed user group is now prohibited.
NBFC-P2P's registered name and brand name shall be prominently mentioned on all its user interfaces, customer interactions, touchpoints, promotional material, and communication with stakeholders or participants.
The NBFC-P2P must now disclose its registration with RBI and RBI’s disclaimer on its website, mobile/web application, and any other promotional material, as stipulated in the notification.
The above changes to the Master Directions are effective immediately. However, the change relating to T+1 requirements for funds in the escrow accounts shall come into effect ninety days from the Notification, i.e., from 14.09.2024 onwards.
Comment
The above changes to the Master Directions are aimed at curbing malpractices and would increase transparency and accountability for the NBFC-P2P platforms. The requirement for one-to-one mapping of funds received from lenders to the amounts received from borrowers for loan repayments, along with a strict T+1 day timeline for settlement, will ensure that funds are not misused.
End Notes
[i] Master Direction – Non-Banking Financial Company – Peer-to-Peer Lending Platform (Reserve Bank) Direction 2017.
[ii] Review of Master Direction - Non-Banking Financial Company – Peer-to-Peer Lending Platform (Reserve Bank) Directions, dated 16.08.2024.
Authored by Eesha Rastogi of Metalegal Advocates. The views expressed are personal and do not constitute legal opinions.