Regulation For ELoans

Posted On - 7 June, 2019 • By - Kulin Dave

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 inventory of options — like personal loans, house loans, loans for 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 Eloans


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 BankBazaar. 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 character of such bodies involved in providing loans and financial
services via mobile based applications.

45 I of the Reserve bank of India Act, 1934 has defined ‘non-banking financial
companies’ in clause (f) as –

financial company” means—

(i) a
financial institution which is a company;

(ii) 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.

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.

India, there are many online P2P lending platforms. Some of these are involved
in the business targeted at micro finance activities with the stated primary
goal being social impact and providing easier access of credit to small entrepreneurs.
They provide web-based platform to bring the lenders and the borrowers
together. In P2P models, the platform – such as Faircent, i-Lend and
– 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 margin for platform and
returns for lender). 

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 business, as the Reserve Bank may


 P2P Lending activities

the pivotal role P2P lending were 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 from RBI

registered as NBFC-P2P shall have a net owned fund of at least Rs. 2 cr unless
a higher amount is specified by RBI

shall only act as an intermediary/facilitator between borrower and lender and
cannot mobilize deposits or give loans on its own

cannot provide credit enhancement or credit guarantee schemes

cannot facilitate or permit any secured lending linked to its platform; i.e.
only clean loans will be permitted


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.

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 too has been reduced. This helps expedite the way people do business or buy new homes.

Contributed By – Kulin Dave
Designation – Associate

King Stubb & Kasiva,
Advocates & Attorneys

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