The Reserve Bank of India (RBI) has said that it will regulate peer-to-peer (P2P) lending platforms as non-banking finance companies (NBFCs).

“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 regulator said in a notification.

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P2P lenders offer unsecured loans by matching lenders with borrowers. The RBI had also issued a consultation paper in April 2016 on these platforms.

In the consultation paper, the regulator said that the P2P lenders pose a risk to the financial system.

“P2P lending is one such business model that has gathered momentum globally and is taking root in India. Although nascent in India and not significant in value yet, potential benefits that P2P lending promises to various stakeholders (to borrowers, lenders, agencies etc) and its associated risks to the financial system are too important to be ignored,” the consultation paper stated.

In the paper, RBI spoke in favour of regulating these alternative lenders citing their potential to disrupt the industry.

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“In its nascent stage, this industry has the potential to disrupt the financial sector and throw surprises. A sound regulatory framework will prevent such surprises,” RBI said.