Help P2P lenders gain official recognition and opens new avenues for fund-raising and business expansion.
What is Peer-to-Peer Lending (P2P) of Crowd-Funding?
P2P lending is a form of crowd funding to raise money which can be paid back with interest.
Enables individuals to borrow and lend money - without an official financial institution like a bank as an intermediary.
Crowd-funding typically uses an online platform matching lenders with borrowers in order to provide unsecured loans.
Provides access to credit to those unable to get it through traditional financial institution.
Also boost returns for individuals suppling capital and reduce interest rates for those who use it.
Peer-To-Peer Lending (P2P) is fraught with risks even more so without a proper regulatory framework.
Background on P2P Lending
RBI consultation paper on developing regulatory norms for P2P lending proposed 6 key areas of regulatory framework:
Permitted activity
Regulations on capital
Governance
Business continuity plan
Customer interface
Regulatory reporting of P2P lending.
Need for Regulating P2P Lending
P2P lending one of the crowd funding models gathering momentum and taking root in India.
Promotes alternative forms of finance with potential to soften lending rates due to lower operational costs and enhanced competition with traditional lending channels.
In 2015 alone, around 20 new online P2P lending companies were launched in India.
At present, there are around 30 startups in the P2P lending business in India
What Are Non-Banking Financial Companies
Non-Banking Financial Company (NBFC) is a company registered under the Companies Act, 1956 engaged in the business of loans and advances, acquisition of shares, stocks, bonds, debentures, securities issued by Government or local authority. A non-banking institution with principal business of receiving deposits is also a non-banking financial company.
Difference between Banks and NBFC
NBFCs lend and make investments like banks, however:
NBFC cannot accept demand deposits
NBFCs do not form part of the payment and settlement system and cannot issue cheques drawn on itself
Deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation is not available to depositors of NBFCs, unlike in case of banks.
Restrictions on NBFC
Must be registered with RBI- no Non-banking Financial company can commence or carry on business only after:
Obtaining a certificate of registration from the Bank
Having a Net Owned Funds of ₹ 25 lakhs (₹ Two crore since April 1999)
Requirements for Registration with RBI
Should be a company registered under Section 3 of the companies Act, 1956
Should have a minimum net owned fund of ₹ 200 lakh.