India, through the Reserve Bank (RBI), has passed P2P lending regulation aimed at protecting consumer interests. In the new laws, a lender must limit their exposure to all its borrowers to not more than 50 lakh ($70,000) at any time on a peer-to-peer platform.
Additionally, a lender’s aggregate exposure to all borrowers at any time is subject to a cap of Rs 5,000,000 ($70,000). Such investments by the lender should be consistent with their net worth.
According to the RBI, any lender investing over Rs 10 lakh ($14,000) throughout P2P platforms should provide a certificate that shows a minimum net worth of Rs 50 lakh. Lenders must demonstrate they understand the risks involved in investing on the platforms.
Other P2P Lending Regulation Changes
Furthermore, “All the lenders shall submit a declaration to P2P platforms that they have understood all the risks associated with lending transactions and that the P2P platform does not assure the return of principal/payment of interest.”
The new P2P lending regulations also touches on transfer mechanisms. According to the RBI, “Escrow accounts to be operated by bank promoted trustee for transfer of funds need not be mandatorily maintained with the bank which has promoted the trustee.”
As such, P2P lending has to happen through an escrow account type of operation and has to be done by a bank promoted trustee.
Escrow accounts will function as follows according to the guidelines: Two escrow accounts should exist, one for funds received from lenders waiting for disbursal, and the other for collections from borrowers. The regulations prohibit cash transactions, requiring all transactions to go through bank accounts.
RBI Guidelines on Payment Systems
Also, the RBI recently introduced the regulation governing payment systems.
The guidelines specify minimum net worth requirements, alongside other sweeping guidelines aimed at fostering healthy competition and promoting innovation.
Under the new regulations, “The payment system operators should ensure interoperability among different retail payment systems.”
The new regulation has introduced guidelines for “on tap” authorization on various payment systems. These include the Trade Receivables Discounting System (TReDS), White Label ATMs (WLAs), and Bharat Bill Payment Operating Unit (BBPOU).
The bid for India P2P lending regulation is a welcome move. It’s joining other countries in the region, and in SouthEast Asia, that have introduced regulations governing the market. Peer-to-peer lending is still a young industry. As such, there is a need to provide better oversight and regulation. These should aim at protecting consumers from unscrupulous platforms, and fostering innovation.