Mumbai - The crowd funding mechanism of peer-to-peer (P2P) lending platforms will be treated as non-banking financial companies (NBFCs) and as such, regulated by the Reserve Bank of India (RBI), the central bank said.
"The Reserve Bank of India specifies a non-banking institution that carries on 'the business of a peer-to-peer lending platform' to be an NBFC," an RBI notification said.
P2P lending functions through online platforms that match lenders with borrowers in order to provide unsecured loans.
The business of a P2P lending platform signifies the service of loan facilitation, online or otherwise, to "the participants who have entered into an arrangement with that platform to lend on it or to avail of loan facilitation services provided by it", the RBI said.
The interest rate on the loan may be set by the platform, or by mutual agreement between the borrower and the lender.
Fees are paid to the platform by both lender as well as borrower. Borrowers pay an origination fee, which can either be a flat rate or as a percentage of the loan amount raised, according to their risk category.
With the start of P2P platforms in the country, the RBI had circulated a consultation paper in April 2016 on such lending platforms.
Although still in its infancy in India and not yet significant in value, the potential benefits of P2P as well as its associated risks to the financial system, are too important to be ignored, the consultation paper said.