Proposed P2P Lending And Bankruptcy Bill

Peer-to-peer lending, sometimes abbreviated P2P lending, is the practice of lending money to individuals or businesses through online services that match lenders directly with borrowers.

Since the peer-to-peer lending companies offering these services operate entirely online, they can run with lower overhead and provide the service more cheaply than traditional financial institutions.

As a result, lenders often earn higher returns compared to savings and investment products offered by banks, while borrowers can borrow money at lower interest rates, even after the P2P lending company has taken a fee for providing the match-making platform and credit checking the borrower.

RBI proposes P2P lending regulations.The Reserve Bank of India (RBI) on Thursday initiated steps to regulate the nascent and hitherto unregulated peer-to-peer (P2P) lending business.

RBI has proposed registering P2P lending platforms as non-banking financial companies (NBFCs).

The banking regulator put out a discussion paper on P2P on its website on Thursday.

Online P2P lending companies work as marketplaces that bring individual borrowers and lenders together for loan transactions without the intervention of traditional financial institutions such as banks and NBFCs.

RBI said it would be desirable to regulate the business because of “the impact it can have on traditional banking channels and NBFCs and its “potential to disrupt the financial sector and throw up surprises”.

In 2015 alone, around 20 new online P2P lending companies were launched in India. At present, there are around 30 start-ups in the P2P lending business in India.

“The balance of advantage would lie in developing an appropriate regulatory and supervisory toolkit that facilitates the orderly growth of this sector so that its ability to provide an alternative avenue for credit for the right kind of borrowers is harnessed,” the paper said.

“The guidelines should strike a balance between overregulation and leaving too many loopholes.

If guidelines are too strict and harsh, it will bring down the P2P market. If P2P isn’t well regulated and things get ugly, the government will come back with heavy restrictions.

But, in any case, the guidelines will bring awareness about the sector and more individual lenders will come on board.

Following are some of  proposed regulations.

—P2P companies must act only as intermediaries and their role must be limited to bringing the borrower and lender together. This basically means that P2P lenders cannot take on the functions of a bank and seek and keep deposits.

—Funds must move directly from the lender’s account to the borrower’s account to prevent risk of money laundering.

—P2P platforms can’t assure returns to lenders.

—The companies must have a minimum capital of Rs.2 crore.

—The platforms may have to adhere to a leverage ratio so that they do not expand indiscriminately.

—Since lenders may not be sophisticated, there may be limits on maximum contribution by a lender to a borrower/segment of activity.

—Promoters, directors and chief executive officers of P2P platforms will have to meet a so-called “fit and proper” criteria.

—Some proportion of the board members of such platforms may need to have a background in finance.

—P2P platforms may be required to have a “brick-and-mortar” presence in India.

—Platforms will need to submit regular reports on their financial position, loans arranged each quarter, complaints and so on to RBI.

—Since RBI can only regulate companies and co-operative societies (and not individuals, proprietorships, partnerships or limited liability partnerships), all P2P platforms may have to be structured as companies.

—The platforms will have to guarantee confidentiality of customer data.

—Loan-recovery practices of the P2P platforms will need to adhere to existing guidelines on recovery practices.

However, the RBI paper is silent on credit risk profiling of the borrowers.

“RBI has not touched on credit risk score, such as details on alternate credit risk. It takes a while before risks start showing. Hence, stricter governance is needed in this space,”

Following are some of suggestions , apprehensions and criticism for making proposed P2P lending successful , effective , harmless and useful

The general opinion is that the regulations will lend respectability to the nascent business—experts, investors, and executives in P2P platforms highlighted some concerns.

The first has to do with the fact that the money has to move directly from lender to borrower without an “escrow account”.

“It is necessary to have an escrow account. You can’t expect the transaction to happen only between lenders and borrowers because it will be tedious from accounting point of view.

The platform will need to maintain an escrow account to pool money since there are post-dated cheques involved,

“For instance, if an individual wants to borrow Rs.10 lakh and there are 10 borrowers willing to pay Rs.1 lakh each. Ideally all lenders should pool the money into an escrow account. But this is not allowed and the borrower needs to take 10 loans of Rs.1 lakh each.

P2P platforms recommend either an escrow or a nodal account.

“In case of fund transfer, there should be a mechanism in place where the P2P lending platform is in the loop on all transactions. It can be like a nodal account that an e-commerce company like Flipkart has for sellers and buyers.

And a prescribed leverage ratio for the platforms makes no sense because “credit doesn’t come from the platform.

What the regulator can do is ask the P2P lenders to create a credit insurance fund to offer some kind of relief in case of default”, said Pai.

But that apart, most of the proposals met with the industry’s approval.

It is a good idea to disallow P2P platforms from promising assured returns “because you don’t want lenders on these platform to get trapped into believing that they will get assured returns”.

And the Rs.2 crore capital requirement “seems adequate to develop a robust P2P sector along with the business continuity plans which will come to the rescue in times of business collapse.

Indeed, the regulator seems to be conscious of the fact that very strict regulation of this sector may impact its growth in its infancy.

RBI will accept feedback on its discussion paper till 31 May.secured personal loans, though some of the largest amounts are lent to businesses.

Secured loans are sometimes offered by using luxury assets such as jewelry, watches, vintage cars, fine art, buildings, aircraft and other business assets as collateral. They are made to an individual, company or charity.

Other forms of peer-to-peer lending include student loans, commercial and real estate loans, payday loans, as well as secured business loans, leasing and factoring.

The interest rates can be set by lenders who compete for the lowest rate on the reverse auction model, or fixed by the intermediary company on the basis of an analysis of the borrower's credit.

The lender's investment in the loan is not normally protected by any government guarantee. On some services, lenders mitigate the risk of bad debt by choosing which borrowers to lend to, and mitigate total risk by diversifying their investments among different borrowers.

Government policies and interventions for development in various sectors and issues arising out of their design and implementation.

P2P lending

Characteristics
Peer-to-peer lending does not fit cleanly into any of the three traditional types of financial institutions—deposit takers, investors, insurers—and is sometimes categorized as an alternative financial service.

Typical characteristics of peer-to-peer lending are:

--it is usually conducted for profit;

--no necessary common bond or prior relationship between lenders and borrowers;

--intermediation by a peer-to-peer lending company;

--transactions take place online;

--lenders may often choose which borrowers to invest in, if the P2P platform offers that facility, Zopa for example doesn't;

--the loans can be unsecured or secured and are not normally protected by government insurance but there can be protection funds like those offered by Zopa and RateSetter in the UK;

--loans are securities that can be transferred to others, either for debt collection or profit, though not all P2P platforms provide transfer facilities or free pricing choices and costs can be very high, tens of percent of the amount sold, or nil.

Early peer-to-peer lending was also characterized by disintermediation and reliance on social networks but these features have started to disappear.

While it is still true that the emergence of internet and e-commerce makes it possible to do away with traditional financial intermediaries and that people may be less likely to default to the members of their own social communities, the emergence of new intermediaries has proven to be time and cost saving. Extending crowdsourcing to unfamiliar lenders and borrowers opens up new opportunities.

Most peer-to-peer intermediaries provide the following services:

--online investment platform to enable borrowers to attract lenders and investors to identify and purchase loans that meet their investment criteria
development of credit models for loan approvals and pricing
--verifying borrower identity, bank account, employment and income
--performing borrower credit checks and filtering out the unqualified borrowers
--processing payments from borrowers and forwarding those payments to the lenders who invested in the loan
--servicing loans, providing customer service to borrowers and attempting to --collect payments from borrowers who are delinquent or in default
--legal compliance and reporting
--finding new lenders and borrowers (marketing)

History
United Kingdom
The first company to offer peer-to-peer loans in the world was Zopa. Since its founding in February 2005, it has issued loans in the amount of 500 million GBP and is currently the largest UK peer-to-peer lender with over 500,000 customers.

In 2010 Funding Circle became the first significant peer-to-business lender launching in August 2010 and offering small businesses loans from investors via the platform. Funding Circle is currently the second largest lender, having lent 170 million GBP as of November 2013.
 
United States
The modern peer-to-peer lending industry in US started in February 2006 with the launch of Prosper, followed by Lending Club and other lending platforms soon thereafter. Both Prosper and Lending Club are located in San Francisco, California.

Early peer-to-peer platforms had few restrictions on borrower eligibility, which resulted in adverse selection problems and high borrower default rates. In addition, some investors viewed the lack of liquidity for these loans, most of which have a minimum three-year term, as undesirable.

This addressed the liquidity problem and, in contrast to traditional securitization markets, resulted in making the loan requests of peer-to-peer companies more transparent for the lenders and secondary buyers who can access the detailed information concerning each individual loan (without knowing the actual identities of borrowers) before deciding which loans to fund.

The peer-to-peer companies are also required to detail their offerings in a regularly updated prospectus. The SEC makes the reports available to the public via their EDGAR (Electronic Data-Gathering, Analysis, and Retrieval) system.

More people turned to peer-to-peer companies for lending and borrowing following the financial crisis of late 2000-s because banks refused to increase their loan portfolios. On the other hand, the peer-to-peer market also faced increased investor scrutiny because borrowers' defaults became more frequent and investors were unwilling to take on unnecessary risk.

Joint parliament standing committee clears bankruptcy law

The joint parliament standing committee has cleared the Bankruptcy and Insolvency Code and is likely to be discussed in the current budget session of parliament. The Bill was introduced in Lok Sabha in December 2015.

⦁ Also, to make the recovery process more efficient and expedient, the SARFAESI (Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest) Act and Debt Recovery Tribunal (DRT) Act have been amended.

About the Bankruptcy Bill:

The proposed Bill aims for a complete renovation of the current insolvency and bankruptcy system in India, which will help streamline the procedure of revival of companies facing financial distress.

⦁ It also aims to improve the ease of doing business and attract more investment in the country.

⦁ The Code will help Indian firms to exit an ailing business while banks stand to gain as they can recover their dues in time.

⦁ The Bill proposes adherence to strict deadlines to decide whether to liquidate a sick company or not, wherein the decision to liquidate a company will have to be reached within 180 days.

⦁ The Bill proposes the setting up of an Insolvency and Bankruptcy Board of India to regulate insolvency professionals and agencies. It also proposes the setting up of a fund dubbed the ‘Insolvency and Bankruptcy Fund of India’.

Significance of this Bill:

As of now, there is no single law that deals with insolvency and bankruptcy in India. A number of provisions spread across various statutes have rendered the insolvency and bankruptcy-related process a legal quagmire significantly hindering the ease of doing business in the country. The new Bill seeks to consolidate all of this into a single Code.

Background:

The Finance Minister Arun Jaitley, in his Budget Speech 2015-16, had identified Bankruptcy Law Reform as a key priority for improving the ease of doing business and had announced that a comprehensive Bankruptcy Code, meeting global standards and providing necessary judicial capacity, will be brought in fiscal 2015-16.

Accordingly, the Government had constituted the Bankruptcy Law Reform Committee to look into various Bankruptcy related issues and give its report along with a draft Bill on the subject to the Government.
Sources: the hindu.

Brokerage house Morgan Stanley has said Reserve Bank's asset quality review (AQR), which led to a higher provisioning for bad loans, is not the "panacea" and the system will continue reporting stress in 2016-17 as well.

"A multiple of 15x probably signifies asset quality stress is unlikely to abate in 2016-17 from the current elevated levels... AQR is not the panacea for the sector," the brokerage said in a note today.

The AQR process was good and forced banks to recognise stress. But the problem is much bigger than just 2% of loans, which were recognised as bad loans." It focused on recent results of private lender Axis Bank, which recognised the entire impact of the review in the December quarter itself rather than the two quarters allowed by RBI.

The lender reported a dip in net income for the first time in over 11 years and also warned that pressure on asset quality would continue.

Axis Bank has placed over Rs 22,000 crore of corporate loans under the watch-list of stressed accounts, which is 4% of its book, and warned that 60% of this might turn bad.

The findings are contrary to investor expectations that the asset quality cycle has bottomed out and 2016-17 is in for some improvement.

Morgan Stanley explained that RBI probably focused only on loans that are already NPAs, but banks did not report them as such.

Implementation of RBI recommendations led to Bank of Baroda and IDBI Bank reporting worst quarterly numbers ever in the December quarter and IDBI warning of more such pressure to follow. BoB had said it was done with all provisioning under AQR in December itself.