The phrase "lending activities" almost always immediately conjures up images of the Reserve Bank of India (or "RBI"). However, RBI does not have exclusive control over the lending industry. The state laws on money lending have long since been forgotten in the middle of countless RBI regulations covering financial companies.
To prevent unregulated indigenous lenders from offering borrowers high-interest rates, money-lending legislation was developed. These regulations demand that money lenders obtain licenses, have a cap on the amount of interest they can charge, and generally state that a court will not hear a case brought by an unregistered money lender.
Did you know? The Money Lenders Act of 1957 gave the Tamil Nadu government jurisdiction over money lending.
What is a Money Lending License?
People with poor credit histories, no bank accounts, and those unable to take funds from friends or relatives turn to money lenders for credit lines. Money lenders fill a hitherto unregulated market gap by primarily catering to a subset of borrowers that other financial firms, including banks, are unable to reach.
Despite the nation's extensive network of financial institutions, people who live in rural areas frequently lack access to these institutions. Furthermore, banks need help to lend money to small farmers because of their stringent KYC and collateral requirements.
People in dire need of money but do not have a bank account, those with a poor credit history, and those unable to borrow money from friends or family turn to money lenders for credit facilities. In many states of India, the Money Lenders Act governs money lenders.
Every money lender must be licensed to operate. Money-lending laws were created by various legislative bodies to stop uncontrolled indigenous lenders from demanding borrowers' excessive interest rates.
These laws typically indicate that money lenders must have licenses, that the amount of interest they may charge is limited, and that a court will not accept a case brought by an unregistered money lender.
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Why Should You Lend Money With A P2P structure?
Peer-to-peer lending, or P2P lending, is a financial intermediary that enables verified borrowers to request unprotected personal loans from different investors who want to earn a better interest return on their investments.
Before granting the certified borrowers the loan amount, investors can view the borrowers' details from the list of verified borrowers on different P2P lending sites.
Lending a sum to several borrowers allows investors to diversify their investments effectively. P2P lending has a very high success rate in India and has developed into a popular investment platform. The RBI has also taken note of this financial innovation and has developed several rules for simple and secure operations.
P2P license In India
The Certificate of Registration (CoR) issued to NBFCs to launch a P2P Landing platform is the equivalent of a P2P Lending license in India. The CoR is a requirement outlined in the 2017 NBFC Peer-to-Peer Lending Platform Rules. According to the instructions, the applicant NBFC becomes known as an NBFC-P2P Lending platform once it has received the certificate.
A contemporary crowdfunding method involves signing up on a peer-to-peer lending website, where lenders and purchasers communicate directly without using an intermediary. A tech-driven marketplace for lending and borrowing money unites eager lenders and desperate borrowers in one location.
Benefits of P2P lending
A P2P lender should have evidence of loan agreements and accompanying paperwork, as well as prior and express authorization from the participant before accessing their credit card information.
Additionally, a P2P lender should help with loan disbursement, repayment, and recovery. The P2P platform will use an escrow account system run by a bank-sponsored trustee to move money between users.
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Possibility of Lower Rates
Compared to established lenders like banks, P2P platforms frequently offer loans with reduced interest rates. Through a peer-to-peer platform, the investors lend money instantly to the borrowers. The primary benefit of P2P is that there are no overhead costs involved, and interest rates are set at competitive levels.
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Friendly User Interface
Peer-to-peer lending operates purely through an internet portal. As a result, the application procedure is simple and quick. Securing money on the P2P automated platform is convenient.
In general, a peer-to-peer lending network offers a list of investors that combine them through an algorithmic matching process and lend loans to borrowers. It suggests that the turnaround time for receiving the funds may be short, sometimes even just a few hours.
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The credit score is unaffected by the initial quote
You will receive a personalized quotation if you apply for a personal loan through a P2P lending platform; this quote won't impact your credit score. It gives a precise image of the potential interest rate offer and the suitability of any potential loans.
So to gain insight into the borrower's financial situation, several reputable P2P platforms run a "soft search" on the borrower's credit record. It guarantees that the search won't come up in subsequent provider searches. As a result, it makes it possible to get information without impacting one's credit score for upcoming loan applications.
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Higher Flexibility and Unsecured Debt than Banks
A P2P network, which offers unsecured loans, does not require any security, which is not the case with banks. To complete the loan transaction, you must put up your personal property with the bank. P2P exists solely to support a quicker application procedure and give you quick access to funds.
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Factors To Consider When Lending Your Funds
The borrower must sign the document, governed by Section 4 of the Negotiable Instruments Act of 1881.Sample formats can be found with a quick Google search. Even if it's not required, it's preferable to write the note on stamp paper and get it noted. Any notary (special judicial official) will certify it for a small fee.
However, loan documentation must be written on stamped paper. You can include as many provisions as possible, such as collateral, bankruptcy, termination, and incorporation of legal heirs. You can check a sample loan agreement format below:
Conclusion
Even though having a valid license under the Money Lending Act enables money lenders to operate legally and pursue defaulters in court, the interest rate cap is one of the main barriers to licensing. Many lenders need to be made aware that this registration is necessary. Organizations need to determine whether they are engaging in lending money and whether they have a proper license to do so, given the severe penalties.
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