All peer-to-peer lending (P2P) platforms will be regulated by the Reserve Bank of India (RBI), according to a government of India notification released on Wednesday.

The gazette notification stated that all the P2P loan platforms will be treated as non-banking financial companies (NBFCs) and will be brought under the ambit of the banking regulator.

“The Reserve Bank of India, on being satisfied that it is necessary to do so, in exercise of the powers conferred on it by... the Reserve Bank of India Act 1934, (2 of 1934) with prior approval from the government, hereby specifies, a non-banking institution that carries on the business of a peer-to-peer lending platform to be a non-banking financial company,” the notification sent by RBI to the government stated.

The notification is a precursor to the norms that RBI is likely to release for regulation of P2P lending in India.

On 13 September, executive director at RBI Sudarshan Sen had said at a conference in Mumbai that the regulator was waiting for a gazette notification from the government specifying that the P2P loan platforms will fall under RBI’s regulatory purview.

“First, we need the government to notify P2P platforms as an entity to be regulated by RBI. That requires a gazette notification. Once that happens, we come out with regulation,” he said, according to a report by the Press Trust of India.

RBI had floated a consultation paper in this connection in April 2016.

“Although nascent in India and not significant in value yet, the potential benefits that P2P lending promises to various stakeholders (borrowers, lenders, agencies etc.) and its associated risks to the financial system are too important to be ignored,” the regulator stated in the paper.

RBI had argued in favour of regulating P2P lending entities in the consultation paper, stating that the sector has the potential to “disrupt the financial sector and throw up surprises”.

The paper further stated that the importance of an alternative lending channel that P2P loan platforms offer also needs to be acknowledged.

“P2P lending promotes alternative forms of finance, where formal finance is unable to reach and also has the potential to soften the lending rates as a result of lower operational costs and enhanced competition with the traditional lending channels. If properly regulated, P2P lending platforms can do this more effectively,” the regulator stated in the paper.

According to RBI, P2P lending is a form of crowdfunding used to raise loans which are paid back with interest.

It can be defined as the use of an online platform that matches lenders with borrowers in order to provide unsecured loans.

The notification will help P2P lenders gain official recognition, opening new avenues for fund-raising and business expansion.

A. Shankara Vaddadi, strategy and policy committee member of India Fintech Forum, an industry body of financial technology firms said, “We have been waiting for NBFC status for P2P lending firms for a while. The notification ends the regulatory vacuum in which these firms were operating. These firms have now been officially recognized.”

The regulatory purview of RBI will lend the sector more credibility.

“The notification will allow more access to institutional funding. So far we have not seen any organized venture capital firm invest in the space. This will change now,” Vaddadi said.

P2P lending firms unlike aggregator firms hold the lender’s money before giving it out to the borrower which creates a risk factor. “Guidelines on P2P lending by the regulator will be important as it involves individual investors’ money. With the notification coming in, the lenders will be more at ease while participating on P2P lending platforms,” said Vinay Mathews, founder and chief operating officer at Faircent, a Gurgaon-based P2P lending firm.

Vaddadi said that banks may consider tie-ups with P2P lenders in future as the sector will now function as per RBI regulations.