P2P lending, or peer-to-peer lending, is a financial innovation that connects verified borrowers seeking unsecured personal loans with investors wanting higher returns on their investments. Peer to Peer lending has already shown to be a highly successful alternative finance mechanism around the world. P2P lending is rapidly gaining traction in India and is gradually becoming a very appealing investment choice for investors. The Reserve Bank of India has already recognized this innovation and has issued laws for the sector.
“Peer-to-Peer (P2P) lending is a crowdfunding type that allows individuals and institutional investors to provide debt financing to a consumer (natural person) or business borrower (legal entity) in the form of a loan agreement that includes the obligation to repay the loan amount including interest (if any).”
RBI regulations
A person, a group of people, a HUF, a firm, a society, or any artificial body, such as a company, can engage in the P2P lending platform. The Master Directions for NBFC Peer to Peer Lending Platform released by the RBI in 2017 regulate P2P lending. With RBI clearance, only an NBFC can register as a P2P lender. The RBI should issue a certificate of registration to every P2P lender. Every non-banking NBFC-P2P should register with the Mumbai-based Department of Non-Banking Regulation. In addition, the P2P must have a net owned fund of at least $20 million and meet other RBI requirements. The leverage ratio of P2P lenders must not exceed 2.
Norms of P2P Lending
- A P2P lender might function as a middleman, offering participants access to an online marketplace or platform.
- Section 45I (bb) of the RBI Act of 1934 and the Companies Act of 2013 prohibit P2P lenders from taking deposits.
- A peer-to-peer lender cannot lend on its own, nor can it provide or organise any credit enhancement or credit guarantee.
- Except for loan-specific insurance products, a P2P lender cannot lend on its own, cannot allow an international flow of cash, and cannot cross-sell any item.
- A P2P lender should make sure that the participants follow the legal standards set forth by numerous legislation.
- Process all data pertaining to the organization’s activities and participants, and store the data on hardware in India.
- It is reverse auction model. here, lenders bid for a borrower’s loan proposal.
- Funds directly move from lenders a/c to borrower’s a/c to avoid case of money laundering.
- A P2P should become a member of all Credit Information Companies (CICs).
- P2P companies should regularly submit data, keeping and maintain credit information and on monthly basis update CICs about all the necessary information.
- Submit quarterly report to RBI
- The maximum duration for sums lent through P2P lending is three years.
Borrowing and lending limits
- Maximum amount a lender can lent across all P2P platform is Rs 50,00,000
- If investor invest for more than 10,00,000 then he shall produce a certificate from practicing Charted Accountant certifying net worth of more than Rs. 50,00,000
- Borrower can borrow minimum Rs. 50,000 and maximum Rs. 10,00,000
- Exposure of single lender to same borrower across all P2P platform should not be more than Rs. 50,000
Pros of P2P lending
- Because of its online presence, application process is faster and more convenient
- Lower Interest rate in comparison to interest rate offered by traditional system
- In most cases, collateral security is not needed.
- Higher return to the investors
- Better flexibility than traditional loan
- P2P channelize lenders fund into multiple loan options. This diversify overall risk of lenders
- Lenders have privilege to choose borrowers on the basis of their credit profile.
- More accessible source of lending
- No extra cost on early repayment of loan
Pros of P2P lending
- Application fee
- Credit Risk
- No insurance/government protection
- Borrower can borrow maximum Rs. 10,00,000