Few people these days manage without borrowing money for urgent needs. Many are willing to take money, whether there is any need or not. Also, there are those who face many hurdles because there is none to lend them money when in need. In this context, it is useful to learn about Peer to Peer (P2P) lending, where loans are available freely. Also, they are good platforms to lend money and earn satisfactory returns.
P2P lending platforms are meeting grounds for borrowers and lenders. Lenders, who are interested in getting high interests for their amounts, offer loans through these platforms. If borrowers are ready to take the loans, as per the conditions laid down by the lenders, P2P platforms will create an opportunity for them to meet and complete the transaction successfully. P2P lending is also called crowned funding or social lending.
There are many P2P platforms where lenders and borrowers come together. This facility is available in the form of websites and apps. For example, they function in a similar manner as marriage brokers, who bring both the parties together. P2P lending system is still in a nascent stage in our country. P2P platforms are much less in number, when compared to conventional lending systems.
For instance, do you have surplus money? Are you interested in earning some interest from it? You can register yourself on a P2P platform and offer loans to anyone who is willing to pay you back with the interest you want. At the same time, borrowers need not run around banks and can borrow from an online platform.
Eligibility criteria for loan
Normally, before sanctioning a loan banks and other financial agencies look at the credit score of the borrower. In P2P system, credit score is not the only criteria. Their profiles on social media, purchases on eCommerce sites, nature of clearing pending bills, present occupation etc., details are taken in to consideration.
Prominent P2P Platforms
Capitol Plot, Lending Club, Island, Fair Cent, Credi Pitbull, Rupaya Exchange, Lend Box, ItoI Funding, Island, Lending cart etc. institutions offer P2P services.
RBI new rules
Centre has brought these P2P platforms under Reserve Bank of India (RBI) regulations, as their functioning is similar to banks and other financial institutions, like NBFC. Accordingly, RBI regulations regarding these are as follows:
- Loans offered through P2P platforms should not be for more than 36 months.
- The amount that is lent via P2P platform should not be more than Rs. 10 lakh. Loans can be offered to any number of borrowers. But the whole loan amount should not be over Rs. 10 lakh.
- Even borrowers cannot accept a loan of more than this amount
- A lender can offer a maximum of Rs. 50,000 per borrower.
- They should be offered as unsecured loans. No sureties of any kind should be demanded. Loans have to be offered, unconditionally, without any kind of surety, bond or mortgage.
- P2P platforms should not lend on its own. It should not accept deposits.
How to take the loan?
Borrowers and lenders should first register themselves on P2P platform. For this, it is necessary to pay a fee in the beginning. While registering their names, kyc documents (address proof, Aadhar, PAN, bank account etc.) should be submitted. The P2P platform will then review their ID and other eligibilities.
The P2P will then study the risk profile of those who want to borrow. It will collect salary slips, letter from company HR, credit card statement, bank statement, ID in social media and other details. Every P2P will prepare a risk profile of each borrower, and give him or her a rating. If it rates a person in low risk category, the borrower might have a chance of getting a loan for a low interest rate. If the risk is high, the rate of interest is hiked accordingly.
Banks should open an escrow account and extend loans through them. It is done in collaboration with the P2P firm. Lenders, after examining the ratings of the borrowers, offer loans to those who they think deserves their helping hand. There are many kinds of lenders (risk in collecting the loans). Lending to those who have low risk factor, desiring high interest rates irrespective of high risk factor and selecting all kinds of borrowers, is not uncommon.
Here lenders themselves decided the risk factor before lending. For instance, Sri Ram has registered at a P2P for a loan. Lenders will look at his risk rating and offer him loan. They will place a bid. Supposing there are three bidders to grant Sri Ram the loan. It is the borrower's wish which of the bidders to accept loan from or to reject all three. Let us say, Sri Ram selects one of them. Then there is an agreement between both the borrower and the lender. After the documents are signed, the amount is transferred to the Escrow account. With the nod of the lender, the amount is transferred from the escrow account to Sri Ram's account. Later, Sri Ram has to pay the EMIs to the same escrow account. If there is any delay in the repayments, the borrower will be fined.
P2P platforms allow borrowers to give post dated cheques in the name of the lenders. They also help in collecting the repayments. But they do not stand as surety for the lenders. Any risk in lending has to be borne by the lenders themselves. P2P platforms are limited to the role of catalysts, communicating between both the parties, providing information, helping in agreements, amount transfer, collecting repayments, etc., services. They get their revenue from the fee that is paid by the members. If the borrowers default on repaying, lenders will have to bear the losses. If money is lent to a high risk borrower, the interest earned is high. But defaulting risk too is high. Owing to this risk factor, some P2P platforms have begun a Protection fund, to save lenders from these losses.
To whom, at what rate of interest
Interest rates on loans availed through P2P platforms are between 12 per cent to 36 per cent. The interest rate is fixed at the end of the deal, depending on the risk rating. Normally, personal loans are available for 12 per cent interest. But it is not easy to lend personal loans to all. It will be according to the profile of the employee. Banks offer personal loans at a rate of 11.5 per cent to those hold a good job. P2P can turn out to be a good platform for borrowers, who are not employees but earn revenue through other means, like business. Also, those who need loans urgently and have no other means of earning them, can approach P2P platforms, even for a high interest rate.
Also, those who have surplus funds and wish to invest them for gain, can register themselves as lenders in P2P platforms and start lending. They can earn interest amounts. There are money lenders around us. It is an ancient practice in India to lend money to close associates and collect interests. P2P platforms have taken this practice to the next level, by creating a secure atmosphere for both the lenders and borrowers. The lenders and borrowers on these platforms need not be known to each other. There is no need to introduce one to the other. The only criteria here is their credit risk. There might be processing and such other fees. Processing fee is usually one per cent. P2P platforms decide as to which lender or borrower to permit and vice versa.
Small and medium businesses faced difficulties in borrowing after demonetisation. This led to the increase in lending on P2P platforms. The number of those who wish to increase their gains, through lending, have an advantage on P2P platforms. That is why it has become an alternate means of investment.
P2P lending, worldwide, has grown from just Rs. 19 crore in 2002 to a whopping Rs. 38,300 crore in 2015. This is because the platforms serve the purposes of both the lenders and borrowers. P2P platforms in Australia, Argentina, Canada (Ontario), New Zealand, UK, France, Germany, Italy and America too, are regulated by the respective regulatory bodies. They are banned in Israel and Japan. The biggest P2P market in the world is China. While hundreds of such firms exist, no regulations whatsoever are implemented here.