The Concept of Peer to Peer Lending (P2P) in India

In today’s marketplace peer-to-peer (P2P) lending or social lending has become a popular method of debt financing. It has come to the aid of lenders who may be small time investors trying their hand on it instead of traditional methods like fixed deposits, mutual funds etc or even those whose primary source of money is lending, as well as borrowers who are not eager to approach banks for meeting their money requirements for various reasons like high interest rates, bank’s requirement of a standard credit scores etc.

The system is such that a borrower’s requirement may be met by not just one but multiple lenders in portions, installments of repayment have to paid to all the sources. Standard methods when fail to fulfill the requirements of the borrower, Peer to Peer Lending is always unconventional yet thriving option.

A lender may examine the borrower’s profile and invest his money with various borrowers according to the willingness of taking the risk. The borrower may earn more through this arrangement than what is earned through savings vehicles provided by the banks and other financial institutions.

What Are the Pros and Cons of the Peer-to-Peer Lending?

Peer-to-peer lending enables individuals willing to lend money and the borrowers who require it on a platform without any intermediary. The removal of such intermediary and with no financial institution present, the rates of interest are better for both parties. The lenders are able to invest their money and gain a higher interest on it than what the financial institutions provide on a savings account or any other type. The borrowers are able to save since the interest rates lower than what financial institutions charge and there is no requirement of a security (unsecured loans). The platform which provides such interaction may charge a fee from the transacting parties flat chargers or as commission or percentage of the finance involved, but such charges also do not add up to the burden to either party.

But this arrangement also comes with cons. Any person transacting via such methods must be aware of the market trends and patterns and should have comprehensive knowledge so as to not fall into any traps or scams and lose money or any resources. One must also be aware that peer-to-peer lending involves more time as well as a risk than that with banks and other financial institutions.

After due research of options available to invest in form of lending and also borrowing for any personal or business requirement, one should go forward with peer to peer business lending. It is a lucrative alternative to traditional methods with pros and cons like any other unit and arrangement.

What is Reserve Bank of India’s Approach Towards Peer-to-Peer Lending (P2P) in India?

Peer-to-peer lending usually works through online platforms. These platforms are regulated by Reserve Bank of India as Non-Banking Financial Companies (NBFC) as per the direction of RBI in October 2017.

A. Along with other directions for existing as well as prospective NBFC-P2P, the scopes of activities for such have been defined. NBFC-P2P should:

a. act as an intermediary providing an online platform to the lenders and borrowers willing to be involved in P2P lending;

b. not lend on its own;

c. not provide or arrange for any credit guarantee or credit enhancement;

d. permit only for clean loans;

e. ensure the adherence of the transacting parties to all the applicable legal requirements as per the prescribed laws;

f. store and process all data relating to its activities, transactions, and participants;

g. not cross-sell any product except for loan specific insurance products;

h. not permit any international flow of funds;

i. undertake due diligence on all the participants;

j. request for prior and explicit consent of the participant to access their credit information;

k. undertake credit assessment and risk profiling of the borrowers and disclose such information to the prospective lenders;

l. undertake complete documentation of loan agreements and other related documents;

m. provide assistance in disbursement and repayments of the loan amount;

n. provide services for recovery of loans.

B. Some prudential norms have been laid down by the RBI circular

a. NBFC-P2P must maintain a Leverage Ratio which does not exceed 2.

b. Lenders have been made subject to a cap of Rs 10 lakh amount that may be lent at any given point of time.

c. Borrowers have been made subject to a cap of Rs 10 lakh amount that may be borrowed at any given point of time.

d. The exposure of a single lender to the same borrower, across all P2Ps, must not be more than Rs. 50 thousand.

e. The tenure of loans must not be more than 36 months.

f. A P2Ps has to obtain a certificate from the transacting parties that such limits as having been prescribed are being met.

C. The RBI has also laid down some operational guidelines for the NBFC-P2P

a. Aboard of NBFC-P2P has to put in place some approved policies regarding:

i. The eligibility criteria for participants on it, both borrowers and lenders;

ii. The pricing of its services provided by it.

iii. The rules for pairing or bringing together lenders and borrowers benefiting them in an equitable and non-discriminatory manner.

b. Any outsourcing by the unit will not diminish any of its obligations and it will also be responsible for actions of its service providers including recovery agents;

c. The NBFC-P2P shall be responsible the confidentiality of information of every participant even when the information has been outsourced to any service providers.

d. A loan must not be disbursed unless all concerned participants have approved of and signed the loan documentation.

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