Review of Master Direction - Non-Banking Financial Company – Peer to Peer Lending Platform (Reserve Bank) Directions, 2017

भारतीय ररजर्व बकैं RESERVE BANK OF INDIA RBI/2024-25/63 DoR.FIN.REC.35/03.10.124/2024-25 August 16, 2024 All Non-Banking Financial Company – Peer to Peer Lending Platforms Dear Sir/ Madam, Review of Master Direction - Non-Banking Financial Company – Peer to Peer Lending Platform (Reserve Bank) Directions, 2017 Please refer to the Master Direction - Non-Banking Financial Company – Peer to Peer Lending Platform (Reserve Bank) Directions, 2017 (the Directions). 2. The Directions envisaged the Non-Banking Financial Company – Peer to Peer Lending Platform (NBFC-P2P Lending Platform) to act as an intermediary providing online marketplace / platform to the participants involved in peer to peer lending. Accordingly, the Directions had laid down clear guidelines regarding various aspects of functioning of NBFC-P2P Lending Platforms. However, it has been observed that some of these platforms have adopted certain practices which are violative of the said Directions. Such practices include, among others, violation of the prescribed funds transfer mechanism, promoting peer to peer lending as an investment product with features like tenure linked assured minimum returns, providing liquidity options and at times acting like deposit takers and lenders instead of being a platform. Such violations, when observed, have been dealt with bilaterally by the Reserve Bank of India for remediation. 3. In view of the above, it has been decided to elaborate and clarify certain provisions with some modifications for proper implementation of the Directions. The amended provisions of the Directions are enclosed in the Annex to this circular. विवियमि विभाग, केंद्रीय कायाालय ,वितीय तल ,मुख्य भिि, शहीद भगत व िंह रोड ,फोर्ा, मुिंबई -400001 Department of Regulation, Central Office, 2nd Floor, Main Building, Shaheed Bhagat Road, Fort, Mumbai-400 001 Email: cgmicdor@rbi.org.in वहन्दी आ ाि है, इ का प्रयोग बढाइए।4. The amended provisions contained in this circular except item I(f)(ii) of the enclosed Annex shall come into effect immediately. Item I(f)(ii) of the Annex shall be effective from ninety days of the date of this circular. 5. The Master Direction – Non-Banking Financial Company – Peer to Peer Lending Platform (Reserve Bank) Directions, 2017 stands modified accordingly. Yours faithfully, (J.P. Sharma) Chief General Manager 2Annex I. Amendment to the existing provisions of the Master Direction (MD) S.No. Para of MD Existing Provision Amended Provision a. 6(1)(iv) An NBFC-P2P shall not provide or arrange An NBFC-P2P shall not provide or arrange any any credit enhancement or credit credit enhancement or credit guarantee. NBFC- guarantee. P2P shall not assume any credit risk, either directly or indirectly, arising out of transactions carried out on its platform. In other words, entire loss of principal or interest or both, if any, in respect of funds lent by lenders to borrowers on the platform shall be borne by the lenders and adequate disclosures to this effect shall be made to lenders as part of fair practices code specified in para 12 of the MD. b. 6(1)(vii) An NBFC-P2P shall not cross sell any An NBFC-P2P shall not cross sell any product product except for loan specific insurance except for loan specific insurance products. It products. may be noted that NBFC-P2P shall not cross sell any insurance product also which is in the nature of credit enhancement or credit guarantee. c. 7(2) The aggregate exposure of a lender to all The aggregate exposure of a lender to all borrowers at any point of time, across all borrowers at any point of time, across all P2P P2P platforms, shall be subject to a cap of platforms, shall be subject to a cap of Rs.50,00,000/- provided that such Rs.50,00,000 provided that the amount lent by investments of the lenders on P2P the lenders on P2P platforms is consistent with platforms are consistent with their net- their net-worth. In case, the amount lent by a worth. The lender investing more than lender is more than Rs.10,00,000 across P2P Rs.10,00,000 across P2P platforms shall platforms, the lender shall produce a certificate produce a certificate to P2P platforms from to P2P platforms from a practicing Chartered a practicing Chartered Accountant Accountant certifying minimum net-worth of certifying minimum net-worth of Rs.50,00,000. Rs.50,00,000. d. 8(1)(iii) NBFC-P2P shall have a Board approved NBFC-P2P shall have a Board approved policy policy in place - Setting out the rules for in place - Setting out the rules for matching/ 1S.No. Para of MD Existing Provision Amended Provision matching lenders with borrowers in an mapping lenders with borrowers in an equitable equitable and non-discriminatory manner. and non-discriminatory manner. e. 8(3) No loan shall be disbursed unless the No loan shall be disbursed unless the lenders individual lender/s have approved the and the borrowers have been matched/ mapped individual recipient/s of the loan and all as per the board approved policy framed in concerned participants have signed the terms of paragraph 8(1)(iii), the individual loan contract. lender(s) have approved the individual recipient(s) of the loan and all concerned participants have signed the loan contract. f. 9 Fund transfer between the participants on (i) Fund transfer between the participants on the the Peer to Peer Lending Platform shall be Peer to Peer Lending Platform shall be through escrow account mechanisms through escrow account mechanisms which which will be operated by a bank promoted will be operated by a bank promoted trustee. trustee. At least two escrow accounts, one At least two escrow accounts, one for funds for funds received from lenders and received from lenders and pending disbursal pending disbursal, and the other for (i.e., Lenders’ escrow Account), and the other collections from borrowers, shall be for collections from borrowers (i.e., maintained. All fund transfers shall be Borrowers’ escrow Account), shall be through and from bank accounts and cash maintained. Under this prescribed funds transaction is strictly prohibited. The transfer mechanism, funds from the lenders’ mechanism as described in the Annex-I bank accounts shall only be transferred to the may be adopted by the NBFC-P2P. Lenders’ Escrow Account and shall only be disbursed to the specific borrower’s bank account after ensuring compliance to the paragraph 8(3) of these Directions. The borrower shall transfer the amount towards repayment of loan from his bank account to the Borrowers’ Escrow Account, from where the funds shall only be transferred to the respective lender’s bank account. Funds from ‘Lenders’ Escrow Account’ shall not be used for repayment of loans and funds from ‘Borrowers’ Escrow Account’ shall not be 2S.No. Para of MD Existing Provision Amended Provision used for disbursement of loans. All fund transfers shall be through and from bank accounts and cash transaction is strictly prohibited. The pictorial depiction of the Funds Transfer Mechanism as described in the Annex-I shall be adopted by the NBFC- P2P. (ii) The funds transferred into the Lenders’ Escrow Account and Borrowers’ Escrow Account shall not remain in these Escrow Accounts for a period exceeding ‘T+1’ day, where ‘T’ is the date on which the funds are received in these Escrow Accounts. g. 11(1)(i)(a) An NBFC-P2P shall be required to disclose An NBFC-P2P shall be required to disclose the the following: following: (i) to the lender (i) to the lender (a) details about the borrower/s including (a) details about the borrower(s) including personal identity, required amount, interest personal identity with his/ her consent (which rate sought and credit score as arrived by should be kept on record), required amount, the NBFC-P2P. interest rate sought and credit score as arrived by the NBFC-P2P. h. 11(1)(iii)(d) An NBFC-P2P shall be required to disclose An NBFC-P2P shall be required to disclose the the following: following: (iii) publicly disclose on its website: (iii) publicly disclose on its website: (d) portfolio performance including share of (d) portfolio performance including share of non-performing assets on a monthly basis non-performing assets (NPAs) on a monthly and segregation by age; and basis and segregation by age. It may be noted that such disclosures shall also include all losses borne by the lenders on principal or interest or both; and i. 12(2) NBFC-P2P shall be required to obtain NBFC-P2P shall be required to obtain explicit explicit declaration from the lender stating declaration from the lender stating that he/she that he/she has understood all the risks has understood all the risks associated with the 3S.No. Para of MD Existing Provision Amended Provision associated with the lending transactions lending transactions and that P2P platform does and that P2P platform does not assure not assure return of principal/payment of return of principal/payment of interest. The interest. The declaration shall also state that declaration shall also state that there exists there exists a likelihood of loss of entire principal a likelihood of loss of entire principal in in case of default by a borrower. The P2P case of default by a borrower. The platform platform shall not provide any assurance or shall not provide any assurance for the guarantee for the recovery of loans. Further, the recovery of loans. Further, the platform P2P platform shall not promote peer to peer shall display a caveat that “Reserve Bank lending as an investment product with features of India does not accept any responsibility like tenure linked assured minimum returns, for the correctness of any of the statements liquidity options, etc. or representations made or opinions expressed by the NBFC-P2P, and does not provide any assurance for repayment of the loans lent on it”. j. Annex VI - NBFCs which choose to outsource NBFC-P2Ps which choose to outsource any of 2 financial services shall, however, not their functions shall, however, not outsource outsource core management functions core management functions including Internal including Internal Audit, Strategic and Audit, Strategic and Compliance functions, Compliance functions and decision- pricing of services/ fees to be charged to making functions such as determining borrowers/ lenders and decision-making compliance with KYC norms for opening functions such as determining compliance with deposit accounts, according sanction for KYC norms. However, for NBFC-P2Ps in a loans (including retail loans) and group/conglomerate, these functions may be management of investment portfolio. outsourced within the group subject to However, for NBFCs in a compliance with instructions in Para 6. Further, group/conglomerate, these functions may while internal audit function itself is a be outsourced within the group subject to management process, the internal auditors can compliance with instructions in Para 6. be on contract. Further, while internal audit function itself is a management process, the internal auditors can be on contract. 4Ⅱ. New provisions added in the MD (i) Para 6(1)(xi) - An NBFC-P2P shall not deploy lenders’ funds in any manner other than as specified in these Directions. (ii) Para 6(1)(xii) – NBFC-P2P shall not utilize funds of a lender for replacement of any other lender(s). (iii) Para 8(4) - The pricing policy shall be objective and NBFC-P2P shall disclose the fees liable to be charged, ab initio, i.e., at the time of lending itself. The fees shall be a fixed amount or a fixed proportion of the principal amount involved in the lending transaction. The fees shall not be dependent upon the repayment by the borrower(s). (iv) Para 8(5) - The practice of matching/ mapping the participants within a closed user group, whether sourced through an outsourced agency or otherwise, is not permitted. Examples of ‘closed user group’ include borrowers/lenders sourced through an affiliate/service provider to the NBFC-P2P. (v) Para 11(4) - NBFC-P2P shall explicitly and prominently mention its name (as mentioned in the Certificate of Registration) along with its brand name, if any, in all its touch points/ customer interfaces including promotional material and any communication with stakeholders/ participants. (vi) Para 12(6) - The platform shall display a caveat prominently on its website, mobile/web applications including any other promotional material used by it that “It is an NBFC-P2P lending platform registered with the Reserve Bank. However, Reserve Bank does not accept any responsibility for the correctness of any of the statements or representations made or opinions expressed by the NBFC-P2P and does not provide any assurance for repayment of the loans lent on it”. 5Annex - I of MD Funds Transfer Mechanism Platform  The Platform will undertake listing of lenders and borrowers.  It will act as marketplace for exchange of information and instructions between the trustee, lenders and borrowers.  It may be provided ‘view only’ access to escrow accounts for monitoring and Flow of Flow of Instructions reporting purpose s. Instructions s Flow of Instructio ns The Lender  The lender will transfer the The Borrower amount from his bank account t o Lenders’ Escrow  The borrower will transfer Account maintained with a the repayments from his bank and operated by the bank account to Borrowers’ trustee. Lenders’ Escrow Account maintained  The len der will issue Escrow with a bank and operated by Funds instructions to the trustee Account the trustee. Transfer via platfor m or otherwise to maintained Borrowers’  The borrower will issue transfer t he funds to bank with a Escrow instructions to the trustee account of the specific bank Account via platform or otherwise to borrower(s). maintained Funds transfer the funds to bank  The funds shall not remain with a Transfer account of the specific in the Esc row Account for a bank lender(s). period exceeding ‘T+1’ day.  The funds shall not remain in the Escrow Account for a period exceeding ‘T+1’ day. Operation by Operation by  the Trustee the Trustee Flow of Flow of Instructions Trust Instructions  Trust will be mandatorily promoted by a bank.  Trust will operate the escrow accounts for transfer of the funds based on the instructions received from the lenders and borrowers via platform or otherwise. ‘T’ is the date on which the funds are received in the respective Escrow Accounts. 6