Peer-to-Peer Lending - An Overview

What is P2P Lending?

Peer-to-Peer Lending or P2P Lending, as it is popularly known, is a method of debt financing that enables individuals to borrow and lend money without the use of an official institution as an intermediary. It removes the middleman from the process but also involves more time, effort, and risk than the general brick-and-mortar lending scenarios. Companies offering Peer-to-Peer lending services generally operate online, and so they can run with low overhead costs and provide the service more cheaply than traditional financial institutions. As a result, lenders can earn a higher rate of interest on their investment, and borrowers can borrow money at a lower interest rate, than those provided by banks or NBFC’s.

How does P2P lending work?

Companies offering P2P lending services operate online, and so, one has to register on the website of a P2P lender as a lender or a borrower. The company then undertakes a comprehensive verification process based on your personal, financial, and professional information. This ensures that the information about all the lenders/borrowers is authenticated and factually correct.

1.     

   For Lenders –

                           The lenders have to follow a simple registration process, pay the registration fees (varies from site-to-site), and provide the required documents. Post-verification, the lender has to fund an Escrow account with the amount he wishes to invest, and then he/she can start investing by sending proposals to borrowers or review different loans requested by borrowers. A lender can fund up to 20% of a borrower's total loan requirement.

Once a loan has been accepted by a borrower, a physical verification of the borrower is done by the P2P platform and an official loan agreement is signed. The borrower then has to provide the required number of post-dated cheques towards the security and repayment of the first EMI. The digital copies of these documents are sent to all investors. After all the formalities have been complied with, the loan is disbursed, and the lender starts receiving EMIs from the following month (usually on or before the 15th of every month). On the failure of a borrower to pay the EMI on time, a penalty is levied on the borrower, which is directly payable to the lender.

2.      For Borrowers –

                The borrowers have to follow a simple registration process, pay registration fees, and provide the required documents. The borrower is then identity-verified, credit-checked, and risk-assessed by considering various parameters including background, employment, and CIBIL rating. The system then indicates the borrowers' ability to repay the loan and an appropriate interest rate risk category is assigned for the loan. The rate of interest ranges from 12% to 28% and the loan tenure from 6 months to 36 months.

Loan disbursal will begin only after a minimum of 75% of the borrowers' funds requirements have been fulfilled, the legal agreement signed, and the requisite number of Post-dated cheques towards security and EMI to the lender have been provided. Any failure to make pay EMIs on the stipulated date shall invite a penal interest.

P2P Lending platforms in India –

P2P lending platforms in India are treated as Non-Banking Financial Companies (NBFCs) and regulated by the Reserve Bank of India (RBI). RBI has published a list of companies that have been registered as P2P lending NBFCs which are –

1. Etyacol Technologies Private Limited – Cashkumar.com

2. Monexo Fintech Private Limited

3. Fairassets Technologies India Private Limited – Faircent.com

4. Fincsquare Fintech Private Limited

5. Luharia Technologies Private Limited

6. Bridge Fintech Solutions Private Limited

7. Bigwin Infotech Private Limited

8. Ohmy Technologies Private Limited

9. Innofin Solutions Private Limited

10. NDX P2P Private Limited

11. RNVP Technology Private Limited - i2ifunding.com

Benefits to Lenders –

1. Easy Registration Process

2. High Returns in the range of 12% to 36%

3. Low Initial Investment

4. Investment can be diversified across multiple borrowers

5. Re-invest payments to earn even higher returns.

Benefits to Borrowers –

1. An easy and fast registration process

2. Lower interest rates compared to traditional financial institutions

3. Easy availability of loans

4. Fixed interest rates and monthly payments. No hidden charges

5. No penalty on paying off the loan early

6. A bad credit score is not an issue

7. No requirement of any collateral

Drawbacks to Lenders –

1. The high returns come with a high degree of risk. As the loans are unsecured, there is a good chance of default on the borrower's part, and the lender may lose whatever he/she may put into the loan.

2. Chances of EMI payments getting delayed

3. Regulations on P2P Lending are still a work-in-progress.

Drawbacks to Borrowers –

1. Not Usually available for large amounts.

2. A low credit score means a high-interest rate.

3. It may be possible that no lenders fund your loan requirement.

Eligibility Criteria –

1. The person should be a resident of India

2. Above 18/21 years of age

3. Valid bank account

4. Valid PAN Card

P2P lending can be another form of investment in your portfolio. For anyone with idle funds in their bank accounts, P2P lending can be a small step towards investing.

For anyone with a not-so-good credit score, this may be your chance to get a loan for your needs, be it business, personal or any other.

Before investing, do read the terms of the policy of the P2P platform and invest only after going through the terms and conditions. The main aspects relating to P2P lending have been covered above, which will help you in making an informed decision.