Wednesday, 30 August 2017

Peer to Peer (P2P) Lending License in India

The need for the personal and commercial finance is gradually increasing in the present financial scenario. The banks, financial institutions, as well as NBFCs are continually trying to bridge the gap between the demand for finance and the supply of finance. However, while applying for the funds on credit with the aforementioned entities, the individual has to go through a number of formalities and most of the times, he or she has to keep certain security to avail such loans. Now, the times are changing. The development of the internet and technology has promoted the growth of opportunities for availing of finances.

Meaning of Peer to Peer Lending (P2P Lending)

P2P is a crowd based system to raise loans, and repayment is done with interest. It is an online system that brings the borrowers and lenders to one platform, thereby matching the demand and supply of the finance. The nature of the funds raised is unsecured. The interest to be paid is either fixed by the online platform or through the mutual agreement between the parties. The platforms earn by charging fees from both the lenders and the borrowers.

The fees paid by the borrowers are either fixed at a flat rate or as a percentage of the loan amount borrowed. The lenders pay an administration fee at a fixed rate or additional fees if they avail any of the additional facilities; such as legal advice etc.

The platform acts as an intermediary involved in the service of the collection of the loan repayments and assessing the creditworthiness of the borrower. Unlike the normal financial intermediation, the platform does not earn from the spread between lending and deposit rates. In a case of equity, debt, and fund based lending, SEBI is the market regulator. However, in P2P lending, banks will be the market regulator.

Global Scenario

At the end of 2015, the global cumulative lending through the P2P platform was recorded at 4.4 billion GBP, which shows a significant increase from 2.2 million GBP in 2012.

In the global market P2P lending is perceived differently by different countries:

1.   Exempt market/ lacks definition– In countries such as China, Egypt, and South Korea, P2P lending is either considered as exempt market or there is no definition of it in the legislation. However, certain regulations exist to protect the borrowers from unfair interest rates, unfair credit provision, and false advertising;
2.   Intermediary Regulation– In certain countries such as Australia, New Zealand, Canada and UK, P2P is considered as intermediaries and thereby regulated under the jurisdiction. The regulations establish the prerequisites for the platforms for registration as well as other rules and requirements to determine how the platform should conduct its business;
3.   Banking Regulation– In territories such as France, Germany, and Italy, P2P lending platforms are regulated as banks due to their credit intermediation function. Hence, they are required to be registered as banks.
4.   US Model-In United States of America, two frameworks exists- one at the national level through Security and Exchange Commission (SEC) and the other at the state level. Certain states out rightly ban such lending, while the other put a limit on a number of funds being raised.
5.   Prohibited– The countries like Israel and Japan have banned the P2P lending in their legislation

P2P Lending in India

The P2P lending model is growing at a faster rate in India also. Many of the P2P lending platforms in India are concentrated on the micro finance activities catering to the financial needs of the small entrepreneurs and unorganized sectors. The main advantage of this model of finance is that the borrowers get funds at comparatively lower rates, while the lenders get a better return on their investment as compared to other conventional lending methods.

Although there is no credible data available on the P2P lending business in India, still, as per newspaper reports, there are around 30 new start-up P2P lending companies in India.

Working on a P2P Model in India

In India, mostly the tech companies registered under the Companies Act, are involved in the activity of P2P lending. They act as an aggregator between lenders and borrowers. The borrower and lender register themselves with the platform, after which due diligence is carried out and those found suitable are allowed to participate in the activities of borrowing and lending.

Several other services such as credit assessment, advisory, recovery etc. are also provided by these online platforms. Moreover, the documentation service is also managed by the platform. The amount of the loan is transferred from the lender’s bank account to the borrower’s bank account and the platform collects post-dated cheques from the borrower in the name of the lender, thereby helping the recovery process.


The P2P model is striving to make a significant place for itself in the financial market. However, there exists no regulatory framework for this practice. In the absence of any regulations governing the activities of P2P lending, there are always certain risks associated with the safety of funds being traded on such platform.
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