NBFC's Peer to Peer Lending Platform PAGE

FINTECH FRIDAY

LEGAL INTELLIGENCE SERIES

NBFC'S

PEER TO PEER LENDING PLATFORM

01 Introduction 0 3

Need of Peer to Peer Lending 02 0 5 Platform

03 The Framework 0 7

How to Set-Up NBFC's Peer 04 to Peer Lending Platform 1 5

05 Regulatory Compliance 2 5

06 Advantages of Peer to Peer 3 4 Lending

07 AMLEGALS Remarks 3 9

Disclaimer: All rights related to names, logos, photos, etc. of any company used in this paper vests with the respective owners and are used here for educational purposes only. All such details are obtained from the public domain without infringing any protected right of the respective owner. 01

Introduction AMLEGALS PAGE | 04

INTRODUCTION

India has always been inclined towards cash transactions. However, with the increase in usage of mobile phones and the accessibility of the Internet in India, the Digital Payments System witnessed exponential growth in India.

Therefore, the Reserve Bank of India (RBI), considering the shift towards convenience and the change in mind-set of the people, introduced NBFC Peer-to-Peer Lending Direction, 2017 to promote and facilitate the use of P2P Platform in India. Essentially, P2P lending is a platform-based lending mechanism that connects lenders directly with market-based creditors. This puts together various classes of creditors and lenders on a common forum and then analyses the desires and requirements of all parties to facilitate a deal that is ideally tailored to both.

Now, in order to avail a loan through P2P Lending Platform, the person is required to register himself on the websites, which will connect him directly with different lenders. Thereafter, the website of the P2P Lending Platform will provide different prices, interest rates and conditions, depending upon the applicant's creditworthiness to make the purchase possible.

Now, due to the recent boom in the use of the Digital Platform, P2P Platform has seen exponential growth, since P2P Lending Platform was earlier seen as providing financial connections to individuals that will be pushed on by traditional banks as a way to reduce student loan debt at a more attractive interest rate.

However, in recent years, P2P Lending Platforms have expanded their coverage, and have now started providing Consumers with credit balance at lower interest rate, Home renovation loans and car leasing loans, in addition to providing loans to meet working capital requirement of their Consumers through their platforms. 02

Need of Peer to Peer Lending Platform AMLEGALS PAGE | 06

NEED OF PEER TO PEER LENDING PLATFORM

In 2016, India had over thirty (30) Peer-to-Peer Lending sites and the number has only exponentially grown thereafter. However, even with first-mover advantage, many sites were unable to capture the market-share and expand their user-base, arguably due to the reserved nature and/or lack of awareness of this type of debt financing in the minds of Indian investors. Nevertheless, Peer-to-Peer Lending sites in India are supporting a large number of lenders who were previously denied or unable to apply for a bank loan.

Further, with the rapidly changing dynamics of the economy and society at large, the number of Indians falling back on loans to meet various needs has increased. India is a relatively young country with an average age of twenty- eight (28) years and this segment accounts for a large percentage of the population, which as a result, has become a big engine for the economy.

Further, after the global downturn of 2008 and the more recent NBFC downturn in the Indian markets, the RBI began searching for alternatives and, as a result, Peer-to-Peer Lending Platforms started to seem highly appealing, primarily due to the perceived low-interest rates, streamlined application and disbursement procedure, coupled with swift lending decisions.

The Government's emphasis on expanding P2P was further illustrated by its recent declaration that the RBI raised the disbursement cap for P2P loans to Rs. 50 Lakhs from Rs. 10 Lakhs, and this is a rare joy that has been highly supervised and limited so far. Further, considering the emergence of several start-ups in this arena, the five-fold extension of the lending-cap would give them some well-needed relief and further draw the interest of venture capitalists. 03

The Framework AMLEGALS PAGE | 08

THE FRAMEWORK

A. PARTICIPANTS

The structure of the various participants and entities who are part of the funding mechanism in conjunction with the Freeman Stakeholder Method (Freeman, 2010) tends to recognize the differences in current work. To describe the word "stakeholder", Freeman's general declaration which states that "an organization's stakeholder is any entity or person who may or must be influenced by the achievement of the goals of the organization" is followed.

a. Lenders, Borrowers and Others

Digital P2P financing is a two-sided sector that, in its very essence, varies from the conventional banking network with its usual obstacles. Lenders and borrowers are the key focus audiences for many of the network operations. Therefore, much of the work focuses on these participants and on the determinants that are important to the performance of the lending cycle.

While lenders are searching for ways to spend capital as efficiently as possible at a specified degree of risk, investors with specific default rates are searching for sources of liquidity. P2P Networks serve as intermediaries to link together these participants. Therefore, it seeks to fulfil the needs of both parties. Occasionally, lenders or creditors also join in associations and establish local societies to coordinate their desires and requirements. AMLEGALS PAGE | 09

b. Regulatory Authorities, Partnered Banks and Others

Being a small part of the financial market involves different regulatory constraints in different countries. Depending on regional legislation, it is often important to have original banks as working business partners. Many publications address the need for bank participation, but mostly to promote the lending process.

This method often involves the validation of the details of the applicant by Credit Bureaus or other authorized Reporting Agencies. Such methods of authentication and recognition often differ from country to country, which ensures that work in this field is not internationally accessible.

B. PERSPECTIVE

a. Borrowers

When lenders tend to retain their record as if they were dealing with the conditions of the loans on a regular basis, acceptance of the potential demand for loans would become even simpler and would not have to go through the paperwork phase.

However, just like NBFC P2P Lending Platform entails several benefits, it has certain drawbacks as well. For instance, there is no assurance that the application for loan acceptance will be approved. However, if the debt volume is bigger, one might need to switch to a provider base that is wider in scope to satisfy all their needs.

Further, if borrowers continue to maintain their profile as if they were complying with the terms of the loans on an ongoing basis, then approval of the future requirement of the loans will become much easier and will not have to go through the documentation process as well. AMLEGALS PAGE | 10

b. Lenders

For borrowers, P2P Lending provides a great deal for their unused capital by way of an alternate means of investment. The investors can receive higher interest rates on their investment in the range of 15% - 50%. Further, investments have predictable and stable returns and act as a major asset class for diversification of portfolios. This also provides greater control over money, as it is being lent to others.

Now, it is usually said that one is required to take higher risks in order to earn higher rewards. However, for taxpayers, the threats are much greater than for lenders. All loans issued on P2P Platforms are of unsecured nature and the platform also does not guarantee their performance. Thus, if the borrower defaults on his loan interest, the lender would be directly impacted.

C. MECHANISM

Some platforms link lenders and borrowers directly, while others link them through a third entity, normally a bank. Digital P2P Lending Platform sites vary in terms of the way the interest rate of the borrower is determined. For instance, the website prosper.com has an auction mechanism whereby lenders are allowed to determine the highest interest rate that they are prepared to pay, within a short period. Further, borrowers may position their offers by choosing the sum of money they are prepared to finance and the total interest rates they are willing to pay.

Now, in scenarios where the loan has been completely repaid, borrowers will always position their offers and manipulate other borrowers by providing loans at lower minimum interest rates. In this scenario, if there are more offers than required to finance the loan, those offers with the lowest minimum interest rate are chosen. Both borrowers would then obtain the interest rate of the highest offer used in the loan for their depositsR, eevgenu ltahtoinuggh A thuet hfioxeridt yin -te Rreesst elervveels B oaf ntkhe oirf oIfnfderisa have been smaller. AMLEGALS PAGE | 11

Further, if the lending phase contributes to a completely secured loan offer, several sites follow the practice of carrying out a further assessment of the borrower's willingness to pay, including the assessment of steady profits. The loan will then be issued to the applicant, who must finally initiate the repayment cycle.

Intermediate online P2P lending platforms produce their income by transaction charges, which they receive from investors as well as lenders. Most receive a settlement charge on a certain amount of the secured debt from lenders, as well as penalties on late or missed payments. Lenders also have to offer a payment charge depending on the sum they have lent to lenders.

D. EXISITING MEMBERS IN THE MARKET

Lendbox is an RBI-accredited NBFC Peer-to-Peer Lending site in India. They are building a competitive climate for lenders and creditors. In contrast to banks and financial institutions, Lendbox reduces interest rates for borrowers and increases investor returns by eliminating mediators such as commercial banks, depository institutions, etc.

Now, Lendbox Platform aims to revolutionize the market for personal loans in India by creating a one-stop-shop for all borrowers with varying profiles and needs who can have access to both retail and institutional investors with varying risk appetites. Lendbox is built to minimize intermediaries, expenses and to enable lenders and borrowers to communicate directly with each other without any secret charges, in the most straightforward, comfortable and effective way. AMLEGALS AMLEGALS PAGE | 12

Lendbox operates with a team of youthful and talented individuals who have come together from varied backgrounds such as investment banking, accounting, technology, E-commerce and start-up management to disrupt the personal credit market in India.

Rupee Circle is a new-era financing firm that is actively contributing to India’s shift to a banking-free country. It was created by a community of like-minded, ambitious individuals with a dream of delivering a straightforward alternative banking solution by explicitly connecting prudent lenders and creditors and allowing fair offers on both sides. This has also created a platform where the criteria of lenders are identified, and creditors finance such loans.

Rupee Circle offers access to high-quality credit for all, at reasonable interest rates, through easy, tech-enabled interface and outstanding customer support. On the other hand, it offers investors favourable risk-adjusted returns through excellent credit risk management and rigorous data science.

Monexo is an online peer-to-peer lending platform created with the goal of delivering superior customer service and increasing certainty in borrowing, through the use of advanced technologies.

PaisaDukan manages the process of the loan on behalf of linked lenders and borrowers. They essentially seek to provide increased convenience and allow the same by incorporating technologies from all over the world. AMLEGALS PAGE | 13

This puts the control button in the hands of their consumers who, in exchange, will operate upon the approval of mutually acceptable terms. They trust in the distribution of the full value to their clients.

This is achieved through removing the existing locks in the lending industry, and the platform does not maintain its own balance sheets, which do not end in interest income from the two partners, through offering legal and recovery assistance, through determining credit risk by a patented credit score-generating algorithm for each loan programme, through providing loans for all legitimate age categories as well as for all collateral criteria.

LenDenClub is one of India's fastest-growing Peer-to-Peer Lending (P2P) Platform. This ties creditors or developers searching for quick yields to creditworthy borrowers eligible for short-term personal loans. Further, they provide investment options to individuals and organizations and do so with a certain level of quality. In addition, the quick, easy-to-use Personal Loans service provided by the LenDenClub provides excellent personal finance solutions to their clients.

Faircent Platform offers a global platform where borrowers and lenders may communicate directly without needing to go through conventional financial intermediaries including banks, who in today's days have become such behemoths that they control the terms and conditions on both borrowers and lenders.

Faircent Platform helps eliminate the high margins that banks and financial institutions make in transactions that take place. AMLEGALS PAGE | 14

This model helps the administrative costs to be held at a bare minimum and the investor to further capitalise on this gain. Faircent is India's first peer-to-peer (P2P) lending site for the Reserve Bank of India (RBI) to obtain a Certificate of Registration (CoR) as an NBFC-P2P.

i2iFunding, in addition to offering end-to-end loan servicing, actively assesses the default risk of each loan project, assigns risk category and proposes a rate of interest for that project, thereby allowing both lenders and creditors to achieve a competitive interest rate.

Further, investors get a chance to collect better risk-adjusted returns while lenders get a chance to get financed at the lowest possible rate, depending on their risk profile and market-driven demand. i2iFunding also provides investors with legal and recovery support in case of default on the part of any borrower. i2iFunding is actively transforming the way financial transfers are carried out. Traditional financial processes do not have the ability to consistently evaluate each of the customers according to their risk profiles due to their high running costs such as high office rents, high personnel costs etc. Therefore, retail loans are perceived to be 'flow business', resulting in consumers of differing credit ratings being purchased together. Not only is this unacceptable to high- credit rating lenders but it often contributes to wasteful usage of financial capital. 04

How to Set-Up NBFC's Peer to Peer Lending Platform PAGE | 16 AMLEGALS

HOW TO SET-UP NBFC'S PEER TO PEER LENDING PLATFORM

A. FORM A COMPANY

To get started, a person will be required to set-up a Private Limited Company under the Companies Act, 2013. This type of business entity allows the owner to limit their liability to their shareholdings or guarantee, the number of shareholders to 200, and further restrict the shareholders from publicly trading their shares.

Process of Incorporation –

a. Fill SPICe+ Form

The Ministry of Corporate Affairs (MCA) has taken several initiatives to make the Incorporation process speedier and efficient in the past few years and, to achieve this goal, the MCA recently revised the SPICe form and introduced the SPICe+ Form in order to promote ease of doing business in India.

The SPICe+ Form is expected to act as a single-window application, which allows a person to fill a single form instead of filling separate forms for the following procedures -

i. Registration/Reservation of Name

According to Section 4 of the Act, the name of the proposed firm shall be reserved until applying for the incorporation and registration of Pvt. Ltd Company in India. Thus, in one form itself, up to six names can be listed in the preferential order along with the context of the requirement for the proposed names. AMLEGALS PAGE | 17

However, before filling out the form, the professional appointed shall create a check for the existence of the such name that the claimant may make an application for the names accordingly. Further, the Registrar has a 100% right to authorize a name query.

Further, provisions laid down by the Act must be considered while applying for approval. To apply for the name, following conditions must be complied with -

The name should be easy to spell and remember;

The name shall be able to provide a distinct identity to the company;

The name should be short and simple;

The name should not contain any word as opposed to public policy or which is prohibited in any manner;

The name should not infringe any Trademark registered nor shall be similar or identical to any company/ LLP registered.

When the application has been accepted, the Registrar shall retain the same name for a term of 60 days. The applicants, in consultation with the expert, shall then file an application for incorporation of a business within the specified time of 60 days, failing which the name reserved shall expire and, thus, for a further duration of 60 days, a fresh application for the reservation of the name shall have to be made. PAGE | 18 AMLEGALS

ii. Attain Director Identification Number

According to Section 153 of the Companies Act, 2013, the MCA assigns a unique number to an individual who applies for the allotment of Director Identification Number (DIN). Unless the DIN is not surrendered or withdrawn, the MCA allocates such special numbers for the duration of a lifetime. Now, SPICe+ Forms permits the filing of an application to attain a DIN for a maximum of three directors of the Company.

iii. Attain Certificate of Incorporation

According to Section 3 of the Act, the requirement for the issuance of the Certificate of Incorporation shall be rendered after the reservation of the name of the proposed organization by submitting the said form. The application shall be submitted by paying the required Government Fess and Stamp Duty as applicable in the case of the State concerned on the portal.

The Registrar, after reviewing and verifying the application for certificate of incorporation along with other documents in the SPICe+ form, may grant the Certificate of Incorporation under its seal and signature in electronic form. The Certificate of Incorporation (COI) issued shall include the Date of Incorporation as well as the Company's Permanent Account Number (PAN).

Further, Application for attaining a Bank A/c Number, PAN, Tax Deduction and Collection Number, GSTIN and registration for EPFO and Employee State Insurance Corporation will also be covered under the same form. AMLEGALS PAGE | 19

b. Attainment of Digital Signature Certificate

According to Rule 8 of the Companies (Registration Offices & Fees) Rules, 2014, the first move is to receive the Digital Signature Certificates (DSCs) of the members participating in the incorporation of the private company. The DSCs are required to fill E-forms on MCA's online portal as issued in the MCA’s Order for the business to be incorporated and other applications to be registered online.

Once E-form is filed on MCA's online portal, the Certifying Authority shall grant the DSC in token form, which shall be valid for 1 to 2 years. The members engaged in the preparation of businesses in India are the subscribers and representatives of the company. The client, on the other hand, is a supporter and potential shareholder of the company.

These shareholders have to file electronic Memorandum of Association (e-MOA) and electronic Articles of Association (e-AOA) by appending the DSCs, while the proposed directors are required to submit a DIN by rendering a request online in the next phase.

B. FORM AN NBFC

a. Eligibility

The RBI, in its NBFC P2P Lending Platform Direction, 2017, has provided the eligibility criteria for a P2P Lending Platform. The criteria are as follows:

Only a Non-Banking Financial Institution, which has incorporated itself as a Company, can undertake the business of a Peer-to-Peer Lending Platform;

A Certificate of Registration (CoR) has to be necessarily obtained from the RBI before commencing the business of a Pee-to-Peer Lending Platform; PAGE | 20 AMLEGALS

Every company seeking registration with the Bank as an NBFC-P2P shall have a net-owned fund of not less than Rupees Twenty Million or such higher amount as the RBI may specify.

b. Registration

The RBI regulates the Peer-to-Peer Lending Platforms to safeguard the interest of borrowers and lenders. The RBI has made it mandatory for all the existing P2P to apply for a license in order to continue working as a P2P platform.

Process of Registration

i. Every existing and prospective NBFC-P2P shall make an application for registration to the Department of Non-Banking Regulation, before the Mumbai branch of the RBI, in the form which will be specified by the RBI for the purpose.

ii. The RBI, for the purpose of considering the application for registration, shall require the following conditions, among others, to be fulfilled -

The company is incorporated in India;

The company has the necessary technological, entrepreneurial and managerial resources to offer such services to the participants;

The company has the adequate capital structure to undertake the business of Peer-to-Peer Lending Platform; AMLEGALS PAGE | 21

The promoters and the Directors of the company are fit and proper;

The general character of the management of the company is not prejudicial to the public interest;

The company has submitted a plan for, or implemented, a robust and secure Information Technology system;

The company has submitted a viable business plan for conducting the business of Peer to Peer Lending Platform;

Public interest shall be served by the grant of CoR;

Any other condition as may be specified by the RBI, fulfilment of which, in the opinion of the RBI, is necessary to ensure that the commencement of or carrying on the business in India shall not be prejudicial to the public interest.

iii. After verification and satisfaction of necessary conditions and plan of business, the RBI gives in-principle approval with a validity of 12 months for setting up of Peer to Peer Lending Platform and to put in place all required technologies to start with the Business of NBFC- P2P. c. Fit and Proper Criteria

NBFC Peer-to-Peer Lending Platform shall -

i. Ensure that a policy is put in place, with the approval of the Board of Directors, setting out the ‘Fit and Proper’ criteria to be met by its Directors. PAGE | 22 AMLEGALS

ii. Ensure that a policy is put in place, with the approval of the Board of Directors, setting out the ‘Fit and Proper’ criteria to be met by its Directors. (NBFC-P2Ps should undertake a process of due diligence to determine the suitability of the person for appointment / continuing to hold appointment as a Director on the Board, based upon qualification, expertise, track record, integrity and other ‘fit and proper’ criteria.)

These criteria shall be consistent with the requirements contained in Annexes II to IV.

iii. Ensure that Directors meet the fit and proper criteria at the time of their appointment and on an ongoing basis, certify and inform the same to the RBI on a half-yearly basis;

iv. Obtain a Declaration and Undertaking from the Directors giving such additional information as may be required in this regard. The declaration and undertaking shall be on the lines of the format given in Annex III;

v. Obtain a Deed of Covenants signed by the Directors, which shall be in the format as given in Annex IV;

vi. Inform the RBI of any change of Directors, or Key Management Personnel, and issue a Certificate from the Managing Director/CEO of the NBFC-P2P that the ‘fit and proper’ criteria in selection of the Directors have been followed;

Further, the statement must reach the Regional Office of the Department of Non-Banking Supervision of the RBI under whose jurisdiction the Registered Office of the NBFC-P2P is located, within 15 days of such change.

AMLEGALS PAGE | 23

An annual statement shall also be submitted by the CEO of the NBFC-P2P to the said Regional Office, giving the names of its Directors for the Quarter ending on March 31, which should be certified by the Auditors;

vii. The RBI, if it deems fit and in public interest, may independently assess whether the Directors are, individually and/or collectively, fit and proper and the NBFC-P2P shall remove the concerned Director/s, on being advised by the RBI to do so. d. Technological Requirements

The RBI, while scrutinizing the applications for registration, has to ensure that:

i. The company has the necessary technological, entrepreneurial and managerial resources to offer such services to the participants;

ii. The company has submitted a plan for, or implemented, a robust and secure Information Technology system;

iii. That, within a period of twelve months, the company shall put in place the technology platform, enter into all other legal documentations required and report position of compliance with the terms of grant of in-principle approval to the RBI;

iv. That the company should have a Board-approved Business Continuity Plan in place for safekeeping of information and documents and servicing of loans for full tenure in case of closure of platform; AMLEGALS PAGE | 24

v. That the company should conduct, at least twice in two years, an Information System Audit of the internal systems and processes by CISA-certified External Auditors and the report of the concerned External Auditor shall be submitted to the Regional Office of the Department of Non-Banking Supervision of the RBI, under whose jurisdiction the Registered Office of the NBFC-P2P is located, within one month of submission of such report by the External Auditor;

vi. That the company should have reasonable arrangements in place to ensure that loan agreements facilitated on the platform will continue to be managed and administered by a third party in accordance with the contract terms, if the NBFC-P2P ceases to carry on the P2P activity;

vii. That the company’s technology should be scalable to handle growth in business. There should be adequate safeguards built into its IT systems to ensure that it is protected against unauthorized access, alteration, destruction, disclosure or dissemination of records and data. The RBI may, from time to time, prescribe technical specifications, as it deems fit;

viii. That the NBFC-P2P platforms would further be required to comply with Master Direction DNBS.PPD. No. 04/66.15.001/2016-17 dated June 8, 2017 on Information Technology Framework for NBFC Sector during the course of its daily operations. The aforementioned Master Direction provides for Regulations regarding IT Governance, IT Policy, Information and Cyber Security, IT Operations, IS Audit and IT Services Outsourcing. 05

Regulatory Compliance AMLEGALS PAGE | 26

REGULATORY COMPLIANCE

A. Transaction Limit

An NBFC P2P Lending Platform connects borrowers, whether individuals or organizations with lenders, thereby allowing them quick access to low- cost loans at affordable costs. An NBFC-P2P usually acts as an intermediary, facilitating transactions between these parties via online medium or otherwise. The current transaction limit for a Borrower on one platform, as per Section 7 of RBI (NBFC P2P) Direction, 2017, is INR 50,000 (Fifty Thousand) and across all P2P platforms is Rupees 10,00,000 (Ten Lakhs).

Further, the current transaction limit for Lenders across all P2P platform is INR 50,00,000, provided that, when a lender invests more than INR 10,00,000 (Ten Lakhs), on a P2P Lending Platform, he/she is required to submit a certificate from a practising Charted Accountant (CA), to the concerned P2P Platform, mentioning that he/she has minimum net-worth of INR 50,00,000 (Fifty Lakhs). Further, a single lender should not expose himself/herself to the same borrower for a transaction exceeding INR 50,000 (Fifty Thousand). Further, the maturity of the loans shall not exceed period of 36 months.

B. Fair Practices Code

An NBFC P2P Lending Platform shall put in place a Fair Practices Code, based on the Guidelines outlined herein, with the approval of its Board. The same should be put up on its website, for the information of various stakeholders. The guidelines are as follows – PAGE | 27 AMLEGALS

An NBFC-P2P shall be required to obtain explicit declaration from the lender stating that he/she has understood all the risks associated with the lending transactions and that the P2P Platform does not assure the return of principal/payment of interest;

The aforementioned declaration shall also state that there exists a likelihood of loss of entire principal in case of default by a borrower, and that the platform shall not provide any assurance for the recovery of loans;

In the matter of recovery of loans, an NBFC-P2P shall ensure that the staff are adequately trained to deal with the participants in an appropriate manner and shall not resort to harassment viz, persistently bothering the borrowers at odd hours, use of coercion for recovery of loans, etc.;

An NBFC-P2P shall ensure that any information relating to the participants received by it is not disclosed to any third party without the consent of the participants;

The Board of Directors shall also provide for periodic review of the compliance of the Fair Practices Code and the functioning of the Grievance Redressal Mechanism at various levels of the management. A consolidated report of such reviews shall be submitted to the Board at regular intervals, as may be prescribed by it. AMLEGALS PAGE | 28

C. Participant Grievance Redressal

An NBFC P2P Lending Platform shall put in place a Board-approved policy to address the grievances/complaints of participants. Complaints shall be handled/disposed of by an NBFC P2P within such time and in such manner as provided for in such Board-approved policy, but in any case within a period not beyond one month from the date of receipt of such complaint.

At the operational level, an NBFC-P2P shall display the following information prominently, for the benefit of the participants, on its website -

The name and contact details (Telephone/Mobile Nos. and email address) of the Grievance Redressal Officer who can be approached for resolution of complaints against the NBFC-P2P;

That, if the complaint/dispute is not redressed within a period of one month, the participant may appeal to the Customer Education and Protection Department of the RBI.

D. Prior Approval of the RBI for Allotment of Shares, Acquisition or Transfer of Control of NBFC P2P

According to the RBI Master Direction, a prior written permission of the RBI is required in case of any allotment of shares which will take the aggregate holding of an individual or group to the equivalent of 26 per cent and more of the paid up capital of the concerned NBFC-P2P;

The permission of the RBI shall also be required in case of any takeover or acquisition of control of an NBFC-P2P lending firm. (It is not necessary for such takeover or acquisition to lead to any change in management for the permission of the RBI to be mandatorily taken); PAGE | 29 AMLEGALS

The permission of the RBI shall also be required in case of any change in the management of the concerned NBFC-P2P which would result in change in more than 30 per cent of the Directors, excluding Independent Directors or in case of any change in shareholding that will give the acquirer a right to nominate a Director.

E. Transparency and Disclosure Requirements

An NBFC P2P Lending Platform is required to disclose the following -

a. To the Lender

Details about the Borrower(s), including personal identity, required amount, interest rate sought and credit score as determined by the NBFC-P2P;

Details about all the terms and conditions of the loan, including the likely return, fees and taxes.

b. To the Borrower

Details about the Lender(s), including the proposed amount, interest rate offered but excluding personal identity and contact details.

Publicly disclose on its website:

Overview of Credit Assessment/Score methodology and factors considered;

Disclosures on usage/protection of data;

Grievance Redressal Mechanism;

Portfolio performance including share of Non-Performing Assets on a monthly basis and segregation by age and its business model. AMLEGALS PAGE | 30

F. Escrow Account Management

The RBI Master Direction of NBFC P2P Lending companies states that the P2P lending companies shall have to open at least two (02) Escrow Accounts – one for funds received from lenders and pending disbursal, and the other for collections from borrowers – in order to facilitate the fund transfer from the Lender to the Borrower. This Escrow Account Mechanism will, in turn, be maintained by the RBI promoted trustee. All fund transfers shall be through and from bank accounts and cash transaction is strictly prohibited.

Transfer of money through the Escrow Account will take place in the following manner –

The Platform will undertake listing of Lenders and Borrowers. It will act as a marketplace for the exchange of information and instructions between the trustee, lenders and borrowers. It may be provided ‘view only’ access to the Escrow Accounts for monitoring and reporting purposes;

The lender will transfer the amount to the Escrow Account maintained with a Bank and operated by the trustee. The lender will issue instructions to the trustee via the NBFC P2P platform or otherwise to transfer the funds to specific borrower;

The trustee will operate the Escrow Accounts for transfer the funds based on the instructions received from the lenders and borrowers via platform or otherwise;

The borrower will transfer the repayments to the Escrow Account maintained with a Bank and operated by the trustee. The borrower will issue instructions to the trustee via the NBFC P2P platform or otherwise to transfer the funds to specific lender. PAGE | 31 AMLEGALS

G. The Information Technology Act, 2000

The RBI Master Direction on NBFC P2P Lending Firms, under its Scope of Activities, provides that an NBFC P2P shall store and process all data relating to its activities and participants on hardware located within India. It further provides that the NBFC-P2P shall undertake credit assessment and risk profiling of the borrowers and disclose the same to their prospective lenders. Direction No. 10 also provides that the NBFC P2P firms can submit their data to Credit Information Companies (CICs).

As discussed above, the P2P platform is a completely Information Technology-driven framework. Therefore, in order to ensure the protection and security of data/information, it is important for the P2P Platform to comply with the Information Technology Act, 2000 (the IT Act) and Information Technology (Reasonable Security Practices and Procedures and Sensitive Personal Data or Information) Rules, 2011 (the IT Rules), and formulate a Data Protection Policy of their own to ensure the safety of its user data since, at the moment, India does not have a separate Data Privacy framework.

Under such Data Privacy Policy, P2P lending Platforms are required to ensure that they comply with the following conditions –

The Policy should clearly state what kind of practices and polices the NBFC P2P undertakes so as to ensure safety of the information provided by Consumer;

The Policy should clearly specify that explicit consent of the Consumer shall be taken before collecting their information and the information collected form them is for lawful purpose(s);

The Policy should clearly specify the purpose of collection of such information and how the same is going to be disclosed, shared and transferred with other Institutions present in the Market AMLEGALS PAGE | 32

The Policy should clearly specify that the information (including Sensitive Personal Information) as classified under Rule 3 of the IT Rules is going to be collected by the company, which is – Passwords, Financial Information such as Bank Account detail, Debit Card or Credit Card detail, Sexual Orientation, Medical records, Biometric Information, Physical and Mental orientation etc.

The Policy should clearly specify the kind of reasonable security practices the NBFC P2P is undertaking to ensure the safety of information stored with company, such as, whether they have International Standard IS/ISO/IEC 27001 “Information Security Management System” present in the company, etc.

H. Personal Data Protection Bill, 2019

The Government of India and Ministry of Electronics and Information Technology (MeitY) formed a Committee to review the lapses and lacunae present in the existing Data Protection Regulations, which so far only exist in the form of the IT Act and the IT Rules, and what can be done to prepare a more robust and comprehensive Data Protection Regulation in India.

This Committee of experts reviewed the existing law very minutely and, keeping in mind the security and privacy of information/data provided by Consumer, they introduced the Personal Data Protection Bill, 2019 (PDPB).

Therefore, P2P platforms will now also have to align their activities in accordance with the draft PDPB. As stated earlier, NBFC P2P Platforms can provide Credit Information of their customers to Credit Information Companies. AMLEGALS PAGE | 33

Further, Section 11 of the PDPB makes it mandatory for the NBFC P2P Platforms to obtain the consent of the consumers in order for the data to be processed (includes dissemination as per the definition under the PDPB). The consent should be free, informed, specific, clear and capable of being withdrawn.

Further, as Financial Data is classified as “Sensitive Personal Information” under the PDPB, Section 11 further states that the data shall be processed only when explicit consent is obtained -

After informing the Data Principal (the information provider) the purpose of, or operation in, processing which is likely to cause significant harm to the Data Principal;

In clear terms, without recourse to inference from conduct in a context;

After giving the Data Principal the choice of separately consenting to the purposes of, operations in, the use of different categories of, sensitive personal data relevant to processing.

Further, Section 33 of the PDPB, bars the transfer of Sensitive Personal Data beyond/outside India. Such data can be transferred outside India only after obtaining the explicit consent of the Data Principal as per Section 34 of the PDPB and, further, such data shall be subject to an adequate level of protection.

The PDPB will now bring in data protection requirements which will address existing issues such as inadequate customer consent and sharing of plain- text data. Further, it will also enable the exercise of rights on part of the Data Principal, like the right to access or portability, and will lead to revamped Contracts to specify Controller-Processor Obligations, purposes, erasure periods, and so on. 06

Advantages of Peer to Peer Lending AMLEGALS PAGE | 35

ADVANTAGES OF PEER TO PEER LENDING

NBFCs have played a crucial role in India's economic development and have been one of the key players in small business financing. Interest rate is the vital component for any loan and the trend has usually been that small businesses continue to pay a very high rate of interest, regardless of the fact that the inflation has been low in recent times and RBI has also resorted to cutting rates to push economic growth.

However, banks have been unwilling to pass on the benefits of such slashing of interest rates to small businesses by making borrowing money cheaper. This is where the latest entrant in the NBFC arena – NBFC Peer-to-Peer Lending Platforms, recognized by the RBI – come in, since they provide attractive interest rates as well as the benefit of making the entire process very simple. P2P Platforms have, thus, quickly become very popular with small businesses, and are quickly proving to be a better choice to raise funds.

Some of the advantages of NBFC-P2P Lending Platforms are as follows:

A. Easy Application Process

P2P Platforms have an easy and quick process to apply. Borrowers complete a simple online application (in about 20-30 minutes, on average), that is then assessed in order to determine the Credit Rating and assign appropriate interest rates. Then, qualified applicants assess their options and pick the most appropriate loan.

Once a loan package is selected, a profile is published on the platform where potential lenders can view it & fund it. Traditional banks simply cannot compete with the ease and speed which P2P platforms offer. AMLEGALS PAGE | 36

B. Low Interest Rate

The low borrowing costs are, perhaps, the most attractive benefit for P2P borrowers. P2P platforms have low overhead costs, so they can afford lower interest charges. In stark contrast, banks have to pay for large branch networks & thousands of employees. To cover their vast operating costs, banks are pushed to charge higher interest rates & add additional service fees to such already higher interest rates.

C. Faster Funding

Borrowers applying for a P2P loan need not experience the slow, frustrating, multi-layered bureaucracy that comes along with dealing with big financial institutions. Instead, technology-driven P2P providers can make quick appraisals & decisions so that borrowers can quickly receive the funds they need. It is common for P2P borrowers to apply for a loan and get it approved the same day, receiving an advantage of a week or two on their funds.

D. No Middleman

There is no arbitrator/middleman in the process with NBFC P2Ps, which excludes all intermediaries. The entire process is done through Smart Contracts that link buyers and sellers on a virtual platform to carry out the transaction(s).

E. Diverse Opportunities

Owners of the NBFC P2P Platforms have the option of diversifying their geography, since there is no need to limit such Platform to a particular position. Along with the above stated advantages, the NBFC P2P Lending Platforms also benefit the SMEs specifically. AMLEGALS PAGE | 37

F. Offering more options to small businesses

The needs of small businesses are very different from those of large corporations. For a small business, money may be needed to meet temporary shortfall in cash, pay salaries, execute a sudden large order or even to do something innovative. P2P Platforms provide a variety of loan products, which target different types of merchants, distributors and retailers.

Further, such Platforms provide a wide array of services, such as daily loans, 90 days’ Line of Credit, finance for working capital requirements of retailers, finance for meeting day-to-day operational costs, etc. P2P Platforms have quickly moved on their feet to cater to the MSME sector reeling from liquidity crunch and high cost of credit.

G. Inclusive Financing

Banks have always been circumspect about taking risks and small businesses often miss out because most are often tagged as risky to lend to. In India, this issue is further aggravated by the lack of financial and credit records, since most small businesses have traditionally depended on cash transactions, which keeps them outside the purview of organized credit.

However, an NBFC P2P Platform covers this gap with the use of tech- based credit algorithms that considers new-age data points and is able to list borrowers that would otherwise be denied by banks and traditional Financial Institutions. PAGE | 38 AMLEGALS

H. Young and Capable

New-to-credit (NTC) and young entrepreneurs are another section of Indian society that find institutional credit elusive. People in the NTC category have usually never taken a loan or used a credit card, which is why they don't have a credit record, but this may not affect their ability to repay a loan they are yet to take.

Individual lenders on P2P Platforms are supportive of young minds and appreciate innovative ideas. For instance, young entrepreneurs, with stability and ability to repay loans, were specifically encouraged through dedicated loan products by Faircent.com. This increase of reach to the NTC segment has proved quite beneficial, with the loan disbursement to NTCs having tripled just during the period from 2018 to 2020. 07

MLEGALS Remarks AMLEGALS PAGE | 40

MLEGALS REMARKS

P2P lending networks put together individuals willing to spend funds, on the one hand, and potential lenders searching for lending, on the other hand. They play the role of an intermediary, assisting in the matching of two parties and the transfer of money between them. Since there is no traditioDnPaIlI TFinancial Institution acting as a middleman and, in turn, none of the overhead costs associated with banking, both lenders and borrowers are able to benefit from more favourable interest rates.

P2P lenders offer both secured and unsecured loan services. Nevertheless, most of the loans in the P2P arena are unsecured personal loans. Secured loans are uncommon for this sector and are typically backed up by expensive products. Due to some unique characteristics, P2P lending is considered to be an excellent alternative source of financing.

P2P financing may be an enticing choice for those who wish to improve their financial assets and are able to accept a modest amount of risk to do so. Despite interest rates on deposits and cash Individual Savings Account (ISAs) now failing to combat inflation, borrowing is likely to preserve the valuation of your assets, and P2P financing may be less risky and less costly than borrowing in stocks and bonds.

A U T H O R S

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