What Are Non-Banking Financial Companies? RBI Regulating Peer-To-Peer Lending Firms

Government notified that Peer-to-peer lending (P2P) platforms will be treated as non-banking financial companies (NBFCs) and thus regulated by Reserve Bank of India (RBI) . Ends the regulatory vacuum for P2P operation.

Non-Banking Financial Companies
  • 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

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.

Examrace Team at Aug 22, 2021