Redefining the Loan Business; Alternate Investment Options: NBFC P2P

NBFC P2P stands for Non-Banking Finance Company Peer-to-Peer lending business governed by the Reserve Bank of India. NBFC P2P is a technology platform that acts as an aggregator/monitor of transactions between loan provider (investor) and loan taker (borrower) in order to keep the space unbiased and fair. It has become a crowdfunding pool nowadays, to collect fund(s) from eligible investors and make the availability of fund(s) to needy people. It is now a new avenue of investment option and an alternative corner for loan seekers for an authentic and hassle-free process.

Current Scenario

Unlike the ongoing fintech burst, the NBFC-P2P is licensed and duly governed by the regulator, i.e., the Reserve Bank of India (RBI). As of January 2022, the RBI has given the Certificate of Registration (CoR) to 25 companies across India.

Geographically, South India, including Bengaluru (known as the tech-driven Silicon Valley of India), Chennai, and Hyderabad, have a total of 9 registered NBFC-P2P companies. The first of these was Etyacol Technologies Private Limited (known as Cashkumar), likely the first city-based registered NBFC-P2P in India. More recently, LF2Peer Financial Services Private Limited has also been registered. The Western Region based out of Mumbai has 10 registered NBFC-P2P (highest across the region) and is widely involved in the higher business, even keeping the Silicon Valley of India, Bengaluru city behind it as far as business volume is concerned, irrespective of the business being entirely tech-driven. Central India has only 1 registered NBFC-P2P namely RNVP Technology Private Limited (known as i2ifunding.com). North India has 5 registered NBFC-P2Ps. Eastern India, as of date, has not even registered a single NBFC-P2P but an applicant might be in the process of getting it done.

Fintech Business

Ongoing fintech businesses are like marketing and servicing agency businesses instead of innovation and developments. Most fintech corporations working in the field are acting as a business associate in terms of lead generation, management, and distribution of underlying products of actual owners i.e., Banks, Financial Institutions, NBFCs, etc. In order to increase and enhance user confidence and experience tech, people are engaging themselves to leverage the existing system at the tip of their mobiles or by implementing easy user interface or instrument acceptability. In a nutshell, it can be said that major fintech players are hedging existing resources against the cost of authorization or license of financial institutions in the market. It is the technology service provider of the owners of underlying assets, not the owner of actual assets, including but not limited to Buy Now Pay Later, Neo Banking, or Google Pay.

Difference

In contrast, the NBFC-P2P is a tech-driven lending business that does not infuse its own funds. Instead, the lender (investor) comes to the platform for utilization of their fund on better borrowers for higher rates of returns. In fact, this license owner is subject to managing an accredited and approved technology platform from the Reserve Bank of India to onboard both Borrower and Lender on its own criteria and with underlying credit assessment methodology without its own involvement. The system participant acts upon the available deal and the same is served by NBFC-P2P, Trustee of the Nodal Account i.e., Escrow Disbursement and Escrow Collection Account with any scheduled Sponsor Bank to operate therein.

Therefore, unlike the fintech people available in the market, NBFC-P2P has its own big market with limited market players. No doubt, it provides an alternative platform to investors for portfolio diversification and wealth maximization, however on the other hand, it is up to you to verify the details before making any investment on those platforms. Similarly, the borrower must also check the authenticity of the platform before entering the transaction. Otherwise, the false representation of NBFC-P2P and fraud against the end user are not new occurences in the financial market.

Regulatory Segment

Authorization Process

The prospective applicant shall form a company domiciled in India under the provision of the Companies Act, 2013. The company shall have a minimum net owned fund requirement of INR 2 Crore. When it says \"form a company\" and \"net owned fund\", the applicant shall make proper provision for underlying expenses and the required capital fund must be enhanced by that provision. It is advisable to go with a fresh company and in the formation of a fresh company costs are associated with the capital structure and service availed. Thus, the capital of INR 2 Crore alone does not support to derive at the minimum requirement of net owned fund of INR 2 Crore. As the company is newly formed, there is no positive reserve; therefore, any expenses, whether for the formation of stamp duty or consultancy fee, directly decrease the reserve and surplus, resulting in the net owned fund below INR 2 Crore. Therefore, it is advisable to maintain a little higher capital when forming a fresh company to apply for the license.

The company shall have the basic three fundamentals of this business domain i.e., necessary technology, entrepreneurship, and managerial resources in line with a robust and secure Information Technology System to get the registration i.e., the Certificate of Registration (CoR) from the regulator i.e., the Reserve Bank of India. Once the company is formed, if required, as per the requirements of getting approval from the regulator, a shuffle is advisable, as during the scrutiny process from the regulator, such changes may not be positively taken. Therefore, it is a must to have proper planning before submission to the regulator.

Primarily, the regulator i.e., the Reserve Bank of India has a three-dimension scrutiny basis: first being the composition of the Board; second, the capital; and third being the business plan vision & mission aligned with the goal of serving the public interest at large if the CoR is granted to the applicant. These aspects must be thoroughly reviewed and appropriately presented with effective quality control; the result can be positive, or the regulator has a very particular rejection model.

Nowadays, fintechs are very active in the finance market but surprisingly these entities are not so proactively applying for the Certificate of Registration (CoR); the reason is sound and loud and clear due to the lacunae of existing practices. The fintech entity\'s purpose is solved by existing traditional NBFC through underlying agreement, keeping the red eye of the RBI on its own, not on the fintech partners. However, in light of the recent developments, the RBI is very proactive and closely monitoring such partnerships and businesses in depth. Often, reminders, notices, and circular are now being issued on various matters including KYC, Penal Interest, digital lending practices, and so on.

Salient Features of Business Model

Let us discuss some special features of this business model, some do\'s and don\'ts to have an in-depth understanding of the business operation/model.

Being a marketplace or platform, participants with their specific login details have access to their own dashboards for various listings. For the lender, it shall be a borrower profile listing with a ranking or score as per the underwriting model, and on the other hand, for a borrower, the list of interested lenders shall be displayed in the dashboard. Both desktop and mobile versions are available in the market for such information. The matter to be checked and taken note of is that such a platform shall be authorized and regulated by the Reserve Bank of India. Such a list of institutions can be checked on the RBI website on https://www.rbi.org.in/Scripts/BS_NBFCList.aspx.

• Online marketplace or platform for the participants (here the participants refer to the Investor (Lender) and Borrower)
• Cannot raise deposits
• Not lending on their own
• No credit enhancement or credit guarantee
• Not holding, on its own balance sheet, funds received from lenders for lending or funds received from borrowers for servicing loans
• No cross-selling (of) any product except for loan-specific insurance products
• Not permitted to international flow of funds
• Store and process all data relating to its activities and participants on hardware located within India
• Undertake due diligence on participants
• Perform credit assessment and risk profiling of the borrowers and disclose the same to their prospective lenders
• Obtain prior and explicit consent of the participants to access their credit information
• Undertake documentation of loan agreement, related documents, and assistance in disbursement and repayment of the loan amount
• Render services for recovery of loans originated on the platform

Prudential Norms

Such registered NBFC-P2P, whose leverage ratio shall not exceed 2. Further, aggregate exposure of lenders to all borrowers at any point of time, across all P2P platforms, shall be subject to a cap of INR 50 Lakh, provided that such investments are supported by their net-worth.

Lenders investing more than INR 10 Lakh across all P2P platforms shall produce a certificate to the P2P platform from a practicing Chartered Accountant certifying a minimum net worth of INR 50 Lakh.

Accordingly, aggregate loans taken by a borrower at any point of time, across all P2Ps shall be subject to a cap of INR 10 lakh, however, the exposure of a single lender to the same borrower, across all P2Ps, shall not exceed INR 50k.

The maturity of loans shall not exceed 36 months. The platform shall obtain a certificate from the borrower or lender, as applicable, that the limits prescribed above are being adhered to, from time and again for compliance matters.

Other than this, in addition to the above, the general prudential norms for income recognition, provision, assets classification, etc. shall be as per the underlying master direction(s) for the non-systematically important non-banking finance company.

Reporting Requirements

Regulated entities, unlike others, shall have segment-specific reporting in addition to general reporting. They are required to get themselves registered with the Financial Intelligence Unit of India (FIU-IND) for the submission of suspicious transaction. Further, to update the credit data, the registered entity will be required to obtain membership of 4 Credit Information Company (CIC) for both pull and push of data for the underwriting model of business.

The credit information data shall be submitted by the 15th of the following month, generally on a monthly basis, in the given format of the CIC company. Further, with the help of the pull-data authority, the registered entity can download the required credit information from CIC, helping the platform to assess the credibility of the borrower. This greatly assists the underwriting model of the company.

Besides this, the RBI has strictly mandated that the following quarterly statements shall be submitted to the aforesaid Regional Office within 15 days after the quarter to which these relate:

• a) Statement showing number and amount in respect of loans disbursed, closed, outstanding at the beginning and end of the quarter.
• b) Amount of funds held in the Escrow Account, bifurcated into funds received from lenders and fund received from borrowers, with credit and debit summations for the quarter.
• c) Number of complaints outstanding at the beginning and end of the quarter, disposed of during the quarter, bifurcated as received from lenders and borrowers.
• d) Leverage ratio, with details of its numerator and denominator.

Other than this, the XBRL reporting, like DNBS13 (Overseas Investment), DNBS02 (Important Financial Parameter), and DNBS10 (Statutory Auditor Certificate) is mandatory.

Conclusion

NBFC-P2P is the future, but most people do not know about it. It can shift the paradigm of traditional banking to the next level, unlike the existing neo-banking concept. Due to recent developments, or rather ongoing developments on a daily basis for the finance segment, NBFC-P2P can do far better than the existing performance. It has a full-fledged concept of being digital and technical, yet the underlying guidelines and regulatory framework will need to come into the picture. It may be that the existing NBFC-P2P is less explored, minimally popular, and not so widely accepted in India as of date, irrespective of its growing popularity today. The concept of this platform is simple: automation of easy finance in a controlled environment, managed and supervised by professionals and industry experts.

Most banks and financial institutions, due to recent developments in product offerings and circumstances, have formed separate Digital Banking Units to provide fair and transparent user interfaces when it comes to mobile or internet banking. The debate on the potential of NBFC-P2P is large, and it has a huge impact on traditional banking. Banks have the license to collect the deposit and lend such deposit to the public at large for their credit needs. On the contrary, NBFC-P2P is a crowdfunding concept where those with idle funds can have investment options, helping the needy people on a decided rate of interest. Funds can be arranged through NBFC-P2P, by not going to the bank unlike earlier, but the cost of raising funds is part of the thought process as the terms are mutually agreed upon and accepted via the platform. The cost of funding on this platform is comparatively expensive if the borrower\'s profile is not good, and the platform management fee is higher. Otherwise, the platform can be an alternative mode for borrowers to raise funds. Similarly, on the other hand, it is an alternative investment platform that assures a return far beyond the return of the bank.

Few among others are doing good business and even requesting limit enhancement, whereas few are not being able to be fully operationalized, considering the growing aspects of both regulator and applicant. More licenses and authorizations will be likely explored in the future. It has been checked and verified as a secure and fair business model, unlike the uncontrolled and non-supervised fintech business operating freely. The future lies with NBFC-P2P, which requires support and marketing education to make it more visible and prominent in the market. A more visionary and capable team is required to further strengthen and make this project viable in order to uplift and promote the Indian Economy in the Digital Chapter on the global stage, both from the regulator\'s point of view or applicant\'s side too.