PEER TO PEER LENDING (P2P)

P2P is new age lending platform for borrowers and lenders.It is regulated by Reserve Bank of India (RBI) and to commence business, the company needs valid certificate of registration from RBI (category NBFC –P2P) under Section 45 IA of the Reserve bank of India Act, 1934.It is a new age alternative asset class for investors and is based on crowd funding concept.

A P2P lending platform provides you (lender) with pre verified list of borrowers like individuals and businesses that requires personal loan or business loan. The company verifies the borrowers through their in house developed algorithms to assign the risk category and based on the risk category, the system assign the interest to be charged from borrower.

The lender selects the borrower based on their risk appetite and horizon as the returns are directly proportional to the risk, the lender is ready to take (High risk-high return,Low risk-low return). After financing the loan, the lender receives the payment in the form of EMI. This is how the lender gets payments every month that actually open doors to month-on-month returns and an alternative income source until the loan is fully repaid.

You can click here to read master direction of RBI for NBFC P2P.

Considering the traditional processes followed by NBFC’s and banks, a large population of unbanked Indians are not able to access loans from organized sector. A huge population of underserved Indians also face loan rejection from banks due to reasons like bad, poor or no credit history. As a result, so many borrowers cannot get loan when they need it the most.

P2P lending is poised at disrupting the financial system. By using new-age data analytics and tech-enabled credit evaluation mechanism, P2P lending is enabling a sustainable lending community, where lenders can earn more from their savings by helping those in need of credit.

Advantages of investing in P2P

1. Returns to investors/lenders

It provides more returns to the investors because of the low intermediation cost.

2. Accessibility

Peer to peer is more accessible to the borrowers because of its purpose and credit profile than the traditional source of loans. In traditional source of funding, many times your loan application gets rejected because of low credit rating and purpose of loans.

3. Power to choose

In P2P, once the loan application approved by the platform, then it gets listed on the platform. The power to give loan or not lies with the investor.

4. Interest Rates

The borrower gets lower interest rates because of the competition between lenders and low intermediation cost.

5. Loans for all sections

P2P platform allows you to borrow from 25,000 to 10 lacs. The Small amount of loans caters to all sections of society.

6. Duration

P2P allows you to borrow for low duration of 3 months also.

7. No pre payment charges

After 3 months, there are no prepayment charges if you wish to foreclose your loans. In banks, they usually charge between 2%-4% of outstanding principal as foreclosure/prepayment charges.

8. Processing time

The processing time in P2P is 24-48 hours which is very fast in loan industry. In banks, the minimum processing time is between 5-7 days.

9. Paperless

In P2P, from processing to disbursement, the process is paperless. Many P2P companies do the physical verification also for the borrowers to check their worthiness.

Disadvantages of investing in P2P

1. Borrowing limit

Currently, RBI has imposed a limit of 10 lacs for both borrowers and investors across all P2P platforms in India.

2. Delay in EMI

Many times, the borrowers delay in EMI repayments. The companies have to develop robust collection systems, thereby increasing the collection process.

3. Default in loans

Loan default is also one of the major issues which has to be taken care by the companies.RBI should come up with the guidelines to handle loan defaults.Currently, it can be handled through over diversification, collection agencies etc.

Note: For loan repayments/loan defaults, the P2P companies are passing information to CIBIL on a monthly basis as per the RBI guidelines.