In layman’s terms, Peer-2-Peer (P2P) lending and borrowing is like a digital marketplace for loans. Hence usually it is known as ‘marketplace lending’ or often gets confused with crowd-funding. Instead of applying for a loan with a bank, NBFC, private finance company or any other loan institution, you can request a loan from regular people like you and me (therefore, the term Peer-2-Peer).
What is it?
Peer-to peer (P2P) lending is a form of direct lending to the end customer. The transaction is facilitated by a neutral third-party, a P2P lending platform. It acts as a bridge connecting lenders and borrowers. There are several online platforms that support P2P lending, such as Milaap, Rang De, Kiva, Ketto, Faircent and Cashkumar. While some such as Rang De operate as not-for-profit ventures, others such as Faircent are for-profit. Some such as Ketto support social causes and also creative projects such as movies and art/cultural shows.
People may borrow for business or personal reasons. On Rang De, for example, the need for money range from cattle farming and school education to solar home lighting. Faircent even facilitates loans for vacations, down payment for two-wheeler purchases, and weddings and family functions.
The advantage for the borrower is that he/she can get unsecured loan for needs which banks may not fund. Unbanked borrowers who don’t have a credit history, too, can borrow from these platforms.
For lenders, the benefit lies in the variety of initiatives they can fund. The return varies with the risk profile of the borrower — higher the risk, higher the return. Given that these are unsecured loans and many a time the borrowers may be unbanked, lenders must do the home work and basic due diligence. Lenders must be aware that the risk of default could be higher in such loans.
How they work?
P2P platforms are tech-based marketplaces that help borrowers secure loan at a fair rate and lenders get a reasonable return on their investment. The first step towards participating in P2P is to sign up on the portal. Both lenders and borrowers must comply with the know-your-customer (KYC) norms stipulated by the RBI and SEBI. Registered users can access the various pre-verified projects or proposals seeking funding.
The loan amount, tenure and the interest rate are calculated by the portal based on the borrower’s ability to repay the loan. The data and inputs they submit at the time of signing up is used for the assessment. Besides, the background of the borrower and their financial condition is validated by the platform either directly or through third-party agencies. Rang De, for instance, has signed up with third-party agency S3IDF to do the background verification and evaluate the borrowers’ repayment capability. Faircent has a verification process based on personal, financial and professional information provided by its registered lenders and borrowers.
Many platforms partner with NGOs and other individuals and organisations to identify people who need money and are looking to borrow.
The interest rate is determined based on the risk score of the borrower, taking into consideration factors such as the borrower’s ability to repay and the tenure of the loan. Faircent offers returns at 12.9-18.6 per cent, depending on the quantum of risk.
However, the returns may only be nominal in social lending platforms. In the case of Rang De, the average return may be less than 5 per cent, while the cost to borrower may be 9 per cent.
How much can one lend?
As per an RBI notification dated October 2017, an individual can lend a maximum of ₹10 lakh across all P2P platforms in India. Likewise, an individual at any given point in time, cannot raise more than ₹10 lakh across PTP platforms. The exposure of any lender to a given borrower across P2P platforms shall not exceed ₹50,000. Over the last few years, there has been a sharp increase in the number of P2P lending platforms facilitating raising of several millions of rupees. To safeguard the interests of the lenders and borrowers, the RBI last November notified regulations to govern the industry.
The platforms should be mandatorily registered as an NBFC – P2P, and the company should have a minimum owned fund of ₹20 million or such higher amount as the RBI may specify. The platform should neither take deposit nor cross-sell any other product except for lending-related insurance.
Also, the company should conduct thorough due diligence and do a credit-profiling and risk-assessment of the borrowers, to be shared with the lenders. The maturity of the loan shall not exceed 36 months.
While the regulatory framework put in place by the RBI is a move in the right direction, risks still exist.
Via : BS/FE