written by | May 11, 2022

Introducing Peer-to-Peer Lending in India

Peer-to-peer lending connects creditworthy borrowers with lenders looking for alternative investment opportunities. P2P lending is a new investment class that allows direct borrowing. P2P lending is one of the ways to get money for your company. P2P business is an online platform that enables lenders and borrowers to lend and borrow quickly, easily, and with various options. The P2P finance concept brings together lenders and borrowers, making it easier for lenders and borrowers to connect. Borrowers can acquire funds at a lower interest rate than banks, and lenders can earn a higher income than bank savings accounts. Nearly 20 peer-to-peer lenders operate in India, with a total loan book of around ₹5,000 crores. The RBI oversees these organisations. 

P2P lending is a legitimate process governed by the RBI, ensuring that borrowers' and creditors' interests are protected. It's done through a variety of internet groups. There isn't any such limit. You are bound by an agreement or promissory note if you sign it and agree to repay the loan at a certain interest rate.

Did you know?

According to the money lending statute, interest on loans cannot be imposed exorbitantly. The maximum amount of common interest charged is 24% per annum.

P2P Business Model

The objective of the P2P business model is to function as a middleman between individuals. It acts as a matchmaker between two parties: one with something to offer (a product or service) and those who can profit. Typically, the P2P business framework reflects a platform that facilitates communication between both parties while establishing rules and regulations, payment systems, and any other processes required for the transaction to succeed.

The danger of both the seller and the customer failing to deliver or pay is reduced by using someone else. Additionally, by cutting production costs and investments, it decreases consumer prices. In a peer-to-peer network, all computers are treated equally, and each workstation has access to the same resources and data. P2P finance is a basic network in which computers can connect and share what's on or attached to their machines with other people.

RBI Regulations

According to RBI guidelines, a "Peer-to-Peer Lending Platform" is an intermediary that provides loan facilitation services to a person who has agreed with an NBFC-P2P to lend or use its loan facilitation services. As a result, a P2P lending site must function as a middleman between the participants. Second, as the definition reads, "online or otherwise," this suggests that any online or offline platform must follow the NBFC-P2P guidelines. Participants must also agree to a contract with the P2P lending platform, and both lenders and borrowers must enrol with the launchpad to use a P2P platform.

Also Read: How to Find the Best NBFC Private Finance Loan and What Are Its Benefits?

How Can a Borrower Use the P2P Model?

  • A borrower fills out an online application on the peer-to-peer lending platform to apply for a loan.
  • The P2P lending sites evaluate the application and give the applicant's risk and credit rating. The reasonable interest rate is then applied to the applicant.
  • So, when the application is approved, the investor provides the applicant with the available options based on his credit rating and assigned interest rates.
  • The candidate might consider the various possibilities and select one.
  • The applicant is responsible for paying interest regularly (typically monthly) and repaying the principal amount when the loan matures.

Conditions for Registering as a P2P Business

It helps lenders diversify their investments by lending small money to many borrowers. The P2P business model creates a win-win situation where lenders and borrowers are on equal footing. Peer-to-peer lending is a type of debt financing that allows people to borrow and lend money without the intervention of a bank or financial organisation. Because there is no mediator between borrowers and lenders, both sides save money on intermediary fees. 

  • Only NBFCs or registered companies in India can operate a peer-to-peer lending platform.
  • One must have a net worth of ₹2 crores to get a Certificate of Registration for a P2P lending firm.
  • If a corporation was already doing such business before the RBI declared it required, the company must meet all of the RBI's requirements.
  • To conduct business activities such as NBFC P2P lending in India, one must first register with the RBI's official website to obtain an NBFC P2P license.
  • The P2P platform allows lenders to select borrowers from a comprehensive and vetted list.
  • To obtain this license, the candidate must submit a thorough application.

The Reserve Bank grants in-principle consent after completing the examination procedure and determining that all conditions have been met. The grant is valid for 12 months from the date of issue. The organisation must deploy the technological platform, organise all critical documents, and submit them to its compliance authority within this time frame. After receiving the applicant's response, the RBI issues a Certificate of Registration as an NBFC P2P.

Nature and Scope of P2P Lending Business

Throughout a financial cycle, the nature of the P2P business model in an economy changes, including the amount and type of debt that a borrower can take on and the role of banks and other lenders. This impacts corporate borrowing, but it also impacts the capital structure of intermediaries.

While a significant study has been done on various aspects of lending, there is relatively little theory explaining why certain lending components are emphasised more than others. The authors of this study present a theory that explains why and how the nature of lending changes with the context in which it occurs.

The Indian fintech sector features many viable companies regulated by the RBI. Thanks to advanced analytics, a strong back-end network, and reliable collection and recovery methods, it succeeds in its fields. Alternative lending and investment products such as P2P lending sites will be a watershed event in the Indian fintech ecosystem in 2020-2021. The Indian fintech scene has been irreparably transformed by peer-to-peer lending. Every Indian now has easy access to immediate finance. As a result, India is rapidly becoming a credit-inclusive nation while also providing investors with one of the most promising asset classes. In this regard, of all the recent fintech disruptors, peer-to-peer lending is the most inventive.

P2P business loan policy

  1. P2P borrowers can benefit from significant cost savings compared to banks or other financial institution rates.
  2. Obtaining a loan from P2P finance is a simple and quick process. All you have to do is register on the website, and you will be immediately connected to the lenders and borrowers on the site.
  3. These extremely tech-savvy sites provide services in a relatively short amount of time with minimum instructions. It streamlines traditional banks' lengthy documentation process and makes P2P loans simple.
  4. These peer-to-peer lending financial forums are dedicated to assisting people and working for their betterment. Because they are based on community service, it is simple to trade information, and most users are pleased with how these sites operate.

Guidelines for P2P Participants

A P2P lender must do proper research on its members, conduct credit checks and danger analysis on the consumers on its site, and disseminate the results to potential lenders. A P2P lender should have documentation of loan agreements and supporting paperwork documentation and get prior and express approval from the participant to access their credit information. They should also help with loan disbursement, repayment, and recovery.

In the P2P platform, the lender will transfer funds through an escrow account managed by a bank-sponsored trustee. The peer-to-peer business model should maintain two escrow accounts, one for receiving cash from lenders and the other for collecting from borrowers. Cash transactions are not permitted on P2P lending sites.

Also Read: How to Apply for the Best Business Loan in India? - Types of Govt. Loan Schemes

What Are the Borrowing and Lending Limits?

  • There were no defined boundaries before the RBI rules, and platforms were allowed to make their selections. A person can now lend a single borrower a maximum of ₹50,000. And an individual's total exposure to P2P lending across all platforms combined cannot exceed ₹10 lakhs.
  • With peer-to-peer lending, they can acquire a loan at roughly 14%. Those with bad credit go to other NBFCs and get loans at 22-23% interest. According to P2P executives, they can get loans for 4% points less with a P2P lender. 
  • There can be no more than ₹10 lakhs in loans from all P2P platforms combined and no more than ₹50,000 from any single lender. All P2P loans obtained through P2P platforms have a maximum payback period of 36 months.

Conclusion

Peer-to-peer lending is a new approach to traditional financial loans that have been used for a long time. When the methods for P2P lending and bank loans are contrasted, we can get to the following conclusion:

  • P2P lending has a more transparent and frequent process. It gives users additional flexibility in terms of lending methods and objects.
  • P2P lending differs from traditional lending in using a credit auction technique. It is determined by the information available on the internet platform.
  • One disadvantage is that P2P lending has poor loan management because it does not use the typical technique of disbursing loans and does not keep track of borrowers' post-loan information.

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FAQs

Q: How much can I borrow through peer-to-peer lending?

Ans:

Across all P2P platforms, no borrower is authorised to borrow more than ₹10 lakhs at any given moment. A lender cannot put up more than ₹50 lakhs on these sites at any given time. A lender's total exposure to a single borrower across all P2P businesses is limited to ₹ 50,000.

Q: What is peer-to-peer lending?

Ans:

Individuals can acquire loans directly from other individuals through peer-to-peer lending, bypassing the financial institution as a middleman. P2P lending has grown in popularity due to websites that make it easier for people to conduct it.

Q: What are some of the drawbacks to P2P lending?

Ans:

Users may be required to pay additional fees and the loan's interest rate. If you have a bad credit rating, you may pay a higher interest rate than typical lenders. If your financial profile is low, you might not be able to receive a P2P loan at all.

Q: What is the maximum amount of money I can make via peer-to-peer lending?

Ans:

With peer-to-peer lending, you can expect to earn between 2% and 6%, depending on how long you're willing to lock your money away and to whom you're lending. If you invest for a longer period and take on greater risk, you will receive a higher interest rate.

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