FinTech is the new applications, processes, products, or business models in
the financial services industry, composed of one or more complementary financial
services and provided as an end-to-end process via the Internet. Platforms like
Bankbazaar, Kissht and AEON began providing its service by keeping an inventory
of options — like personal loans, house loans, loans for a vehicle, smartphones
loans etc. — that consumers would be quick to buy and apply for finance. These
companies are application-based end-to-end financial service providers. The
article gives an overview of regulation for E-loans.
Laws Guiding The Applications – Regulation For E-Loans
There are three different models in this app-based online lending. The first is
venture-based ones like Capital Float and Early Salary. The second is
peer-to-peer lenders (P2P) like Faircent, i-Lend and Vote4Cash. The third model
is the digital DSA (direct sales agents) followed by the likes of IndiaLends and
While venture-funded lenders need little explanation, the P2P lending model is a
more interesting one.
In order to establish what laws govern such medium it is imperative to identify
the functional the character of such bodies involved in providing loans and
financial services via mobile-based applications.
Section 45 I of the Reserve bank of India Act, 1934 has defined ‘non-banking
financial companies’ in clause (f) as-
“non-banking financial the company means-
- a financial institution which is a company;
- a non-banking institution which is a company and which has as its
principal business the receiving of deposits, under any scheme or
arrangement or in any other manner, or lending in any manner;
- such other non-banking institution or class of such institu¬tions, as
the Bank may, with the previous approval of the Central Government and by
notification in the Official Gazette, specify.
“Non-banking financial company – Peer to Peer Lending Platform (NBFC-P2P)
means a non-banking institution which carries on the business on a Peer to Peer
Lending Platform. Peer to Peer Lending Platform means an intermediary providing
the services of loan facilitation via online medium or otherwise, to the
participants as per the RBI directions. Therefore, it is safe to say that these
non-banking companies viz. Bankbazaar, AEON, Kissht providing financial services
are peer to peer lending platforms.
In India, there are many online P2P lending platforms. Some of these are
involved in the business targeted at microfinance activities with the stated
primary goal being social impact and providing easier access to credit to small
entrepreneurs. They provide a web-based platform to bring the lenders and the
borrowers together. In P2P models, the platform – such as Faircent, i-Lend and
SMEBank.in – charges about 1 per cent from the lender and 2-4 per cent from the
borrower as a ‘fee’. The platform does value addition for the lender by carrying
out due diligence on the borrower and provides its risk assessment. And, it
assists borrowers by putting them in touch with the lenders.
One of the main advantages of P2P lending for borrowers has been lower rates
than those offered by money lenders/unorganized sector and the advantages for
lenders are higher returns than what conventional investment opportunities
offer. Interest rates and the methodology for calculating those rates vary among
P2P lending platforms. They range from a flat interest rate fixed by the
platform to dynamic interest rates as agreed upon by the borrowers and the
lenders to cost-plus model (operational costs plus a margin for platform and
returns for the lender).
The RBI has laid down certain directions with regard to P2P lending provide a
framework for the registration and operation of NBFC-P2Ps in India. It states
that Companies that are undertaking the business of Peer to Peer Lending
Platform, as defined at paragraph 4(1)(v) of these directions, as on the date of
effect of these directions, shall apply for registration as an NBFC-P2P to the
Bank within 3 months from that date. Such companies, which have applied to the
Bank for registration as an NBFC – P2P, shall be permitted to continue the
business of a Peer to Peer Lending Platform till their application for issuance
of CoR is rejected, subject to such conditions, including winding down of the
business, as the Reserve Bank may impose.
RBI Regulations For NBFC – Regulation For ELoansP2P Lending activities
Seeing the pivotal role P2P lending was likely to be playing in the near future,
RBI came out with a set of regulations that will govern this sector. Only
entities that are registered under the Companies Act can get a P2P registration
- Companies registered as NBFC-P2P shall have a net owned fund of at least
Rs. 2 cr unless a higher the amount is specified by RBI
- NBFC shall only act as an intermediary/facilitator between borrower and
lender and cannot mobilize deposits or give loans on its own
- They cannot provide credit enhancement or credit guarantee schemes
- They cannot facilitate or permit any secured lending linked to its
platform; i.e. only clean loans will be permitted
The Aadhar Act 2016
The companies have laid down certain procedures for KYC validation which mandate
the linking of the applicant’s Aadhaar number. Aadhaar-driven eKYC has enabled
the new ecosystem to validate a potential borrower in a matter of seconds rather
than days. Aadhaar Act also plays an important role in Regulation For ELoans as
Aadhar driven eSign has allowed a path to a completely paperless process for
many applicants. The Act does not prevent the use of Aadhaar to establish the
identity of an individual for any purpose, by the State, any corporate body or
person, pursuant to any law. The provisio in the Section however states, that
the use of Aadhaar shall be subject to the procedure and obligations under
Section 8 of the Act.
It is obligated upon these companies (in capacity of requesting entities) that
the consent of the Applicant is taken before collecting information as to his
identity and ensure that the identity information of an individual is only used
for submission to the Central Identities Data Repository for authentication.
The applicant is also entitled to the knowledge of the nature of information
that maybe shared by the Company upon authentication or the uses to which the
information may be put by the company.
In September 2018, the Supreme Court read down certain provisions of the Aadhaar
Act, 2016 that impacted the use of Aadhaar authentication by private parties
under a contract. This affected the growth of technological financial industries
which relied on the authentic identification number for their services.
However, soon these companies came up with KYC compliances for the consumers
with regard to the identity and address of consumers. Post this development, the
Government amended the Prevention of Money Laundering Act, 2002 to allow holders
of Aadhaar to voluntarily disclose their Aadhar to private entities for
verification. This has brought some relief to Fintech companies.
A big advantage of taking a loan from NBFCs is that they can vary their rate of
interest, which banks can’t due to RBI norms. When banks offer new loans with
floating interest rates, they are linked to the Marginal Cost of Lending Rate (MCLR),
which mentions the intervals at which the interest rate automatically changes.
However, since NBFCs are linked to the prime lending rate (PLR), which is
outside the ambit of the RBI, they can offer varying rates.
With the advent of Fintech companies, there has been a rise in Regulation For
ELoans with eKYC and online banking, which enables applicants to upload all
required loan application documents online, the disbursal time of loans to has
been reduced. This helps expedite the way people do business or buy new homes.