NBFC Current Affairs

RBI to regulate peer-to-peer lending firms as NBFCs: Government

The Union Government has issued gazette notification, notifying that Peer-to-peer lending (P2P) platforms will be treated as non-banking financial companies (NBFCs) and thus regulated by Reserve Bank of India (RBI).

The notification will help P2P lenders to gain official recognition and opens new avenues for fund-raising and business expansion. It also ends the regulatory vacuum in which P2P lending firms were operating.

Background

The RBI had floated a consultation paper in April 2016 on developing regulatory norms for P2P lending. It had proposed 6 key areas to frame regulatory framework encompassing permitted activity, regulations on capital, governance, business continuity plan and customer interface and regulatory reporting of P2P lending.

Peer-To-Peer Lending (P2P)

P2P lending is a form of crowd-funding used to raise loans which are paid back with interest. It enables individuals to borrow and lend money – without use of an official financial institution as an intermediary. It can use an online platform that matches lenders with borrowers in order to provide unsecured loans. P2P lending gives access to credit to borrowers who are unable to get it through traditional financial institution. It boosts returns for individuals who supply capital and reduces interest rates for those who use it.

Need

P2P lending is one of the crowd-funding business model that has gathered momentum globally and is taking root in India. It promotes alternative forms of finance, where formal finance is unable to reach. It has potential to soften lending rates as result of lower operational costs and enhanced competition with traditional lending channels. If properly regulated, P2P lending platforms can do this more effectively. Though it is in nascent stage but it is not significant in value yet, but it promises potential benefits to various stakeholders (borrowers, lenders, agencies etc).

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RBI relaxes group limit for NBFCs in insurance joint ventures

RBI has decided to consider a case-to-case basis relaxation of the 50% group limit norm for NBFCs (Non-Banking Finance Companies) in the equity of insurance joint venture (JV).

As per the norms of IRDA (Insurance Regulatory and Development Authority), if  an insurance company wants to enhance its capital it has to do be in compliance with the stipulations of the Insurance Act and the solvency requirements of the insurance company. As per these rules, the current restriction of a group limit of the NBFC to 50% of the equity of the insurance JV  which, according to the RBI, may act as a hindrance for the insurance company in satisfying the requirement of IRDA.

Under the current guidelines, if more than one company (irrespective of doing financial activity or not) in the same group of the NBFC intends to acquire a stake in the insurance company, the contribution by all companies in the same group have been counted for the limit of 50% equity investment in the insurance JV.

Keeping this in view, the RBI has decided that in cases where IRDA issues call for capital infusion into the insurance JV, it will consider need-based relaxation of the 50% group limit on case-to-case basis.

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