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This article is written by Gitika Jain, pursuing a Certificate Course in Banking & Finance Practice: Contracts, Disputes & Recovery from LawSikho.

P2P lending : an introduction 

Peer to peer lending (P2P) platform matches the lenders or investors with the relevant borrowers and issuers usually on an online platform. These platforms enable the lender to provide loans to the borrowers with interest rates. The provision of these loans is available between individuals as well as small and medium-sized enterprises or businesses. 

P2P lending is a sort of direct money lending to such individuals or businesses that do not want to involve themselves in the process of financial institutions acting as intermediaries in the deal. These landings offer both secured as well as unsecured loans; in fact, most of the P2P lending loans are unsecured personal loans.

P2P lending and its legal framework

The regulation of P2P lending is governed by the Reserve Bank of India (RBI) and the same has been made subject to the master directions-non banking financial company- peer-to-peer lending platform (Reserve Bank) direction 2017 updated as of 23rd February 2018 (“master directions”).

According to this master direction, only those non-banking institutions that are registered as companies can undertake the business of P2P lending platforms. Additional Non-Banking Financial Companies (NBFC) that intend to carry on the business of P2P lending are required to obtain a Certificate of Registration (CoR) from the RBI (Department of non-banking regulation, Mumbai).

Important regulatory considerations

  1. Participant grievance redressal. 
  2. Cap on the lending limit. 
  3. Cap on the borrowing limit. 
  4. Submission of data to credit information companies.

Responsibility of P2P platforms towards the contributors and borrowers

The master directions explicitly provide for responsibilities to be adhered to by the NBFC-P2Ps towards the investors and borrowers. The lenders are to be informed of the details regarding the borrowers which include personal identity, required amount of funding, interest rates sought and the credit rating score maintained by the NBFC-P2P. Additionally, all the details about the terms and conditions of the loan including the likely returns, fees, and taxes are to be disclosed to the lenders.

The master directions do not provide for any restriction on borrowing funds as business loans. The threshold for aggregate loans taken by a borrower or lent by a lender, across all P2Ps is subject to INR 1 million. The gist of the RBI risk exposure guidelines is that between one lender and borrower the cap is Rs 50,000, exposure of one lender across the P2P mechanism is Rs 50 lakh and one borrower can avail a maximum of Rs. 10 lakh across all P2Ps. The borrowers are to be informed of details regarding the lenders which include the proposed amount, interest rates offered; however personal identity and contact details are not provided by the NBFC-P2P to the borrowers. 

The platform that provides P2P lending facilities in India are:-

  1. i2iFunding.com
  2. Lendbox.in
  3. Lendenclub.com
  4. OmlP2P.com

Scope of activities of NBFC-P2P

The NBFC-P2P shall:

  • Act as an intermediary providing an online marketplace for participants involved in peer-to-peer lending.
  • Not raise deposits as defined by or under Section 451(bb) of the Act or the Companies Act 2013.
  • Not land on its own.
  • Not provide or arrange any credit enhancement or credit guarantee.
  • Not facilitate or permit any secured lending linked to its platform.
  • Not held on its own balance sheet, funds received from lenders for lending, or funds received from borrowers for servicing loans.
  • Not cross-sell any product except for loan-specific insurance products.
  • Not permit the international flow of funds.
  • Store and process all data related to its activities and participation on hardware located within India.

Additionally, NBF-CP2P shall:

  • Undertake due diligence on the participants.
  • Undertake credit assessment and risk profiling of the borrowers and disclose the same to their prospective lenders.
  • Require prior and explicit consent of the participant to access its credit information.
  • Undertake documentation of loan agreements and other related documents.
  • Provide assistance in disbursement and repayment of the loan amount.
  • Render services for the recovery of loans originated on the platform.

Advantages of P2P lending 

P2p lending offers a faster and convenient method of application as it is online 

P2P platforms are established entirely online which means that the application process is faster and convenient and very handy when it comes to securing funds quickly. Most of the time the P2P platforms already have a list of investors waiting to provide loans to the appropriate borrowers which means that the time of getting the money of borrowers can be very quick, sometimes even a few hours. 

Access to lower rates

Borrowers can sometimes have access to loans with interest rates that are lower than in case they have obtained a loan in a traditional manner like from banks and building societies. This is because the investors provide money directly to the borrowers through these platforms and hence there is no point of any intermediary associated with such financial providers. This in turn leads to the benefit of both the parties from more favourable rates.

No impact on the credit score because of receiving the initial quote

Personal loans through P2P lending have become very easy and the credit score is not at all affected because of getting a personalised quote. This in turn provides an affordable and better idea of any prospective loan. 

Having room for another option for a loan to be obtained from traditional lenders

The P2P platform plays an important role in looking towards those who opt for an alternative method that is the traditional method to fulfill their financial needs which in turn creates a healthy marketplace for consumers.

Transaction of unsecured loans and better flexibility than traditional loans

Since P2P loans are both secured as well as unsecured there is no compulsion of providing any security for securing the loan like is the case otherwise.  This also ensures that the application process remains quick and uncomplicated, allowing you to access funds in a shorter period of time. In addition, P2P loans offer much more flexibility than other types of loans. For instance, at lending works, you can make an overpayment or even settle the balance of your loan at any time, with no extra costs involved. You can even change your monthly repayment date to suit your own finances, so if your payday is on a certain date each month, you can set your loan repayment to take place on the same day.

Higher returns for the investors

In comparison to other types of investments, P2P provides higher returns to the investors. P2P loans usually come with lower interest rates because of the greater competition between lenders and lower origination fees. P2P can potentially give you access to significantly higher returns than you could get through a high-street savings account.

Choice

The person can choose whether he or she wants to lend to, based on the credit profile of the borrower.

Risk diversification

Since this platform has found access it lets the capital be spread across multiple loans which enables it to diversify the risks.

Disadvantages of P2P lending

The compulsion of passing a credit check and another internal check to secure the loan

Although the need for traditional lending does not arise in scenarios where P2P lending has come to the rescue, it does not mean that the need for the underwriting process is also eliminated. All P2P lending platforms require the borrowers to pass a credit check to ensure that the person is creditworthy. Along with the credit check the borrower also has to pass some internal checks. The reason behind this is pretty simple: it aims to protect the funds of investors who provide loans and to differentiate between the ones who default and the ones who are creditworthy.

Payment of an application fee

Whenever the borrower applies for a loan with the bank or any traditional lenders he will need to pay a loan arrangement fee. What P2P loans do not have any loan arrangement fee instead they make money by matching the lenders and the borrowers. This charge will depend entirely on how much borrowing is required and for how long is the loan term and how creditworthy is the borrower.

Legislation

Peer-to-peer lending is not allowed in all jurisdictions. Some jurisdictions like Australia, Argentina, Canada (Ontario), New Zealand, and the United Kingdom require such platforms to comply with investment regulations. So this facility may not be available for all the borrowers or lenders.

Risk of credit

The P2P lending platforms are generally the ones that have high credit risks since the borrowers applied through these platforms have a low credit rating and it does not allow them to obtain traditional loans from the bank.

No tax-free interest

Any interest that is owned by way of P2P lending shall be taxable and it needs to be disclosed on the annual tax return. Apart from the facility of personal savings allowance, you will have to pay tax for any interest you earn. Furthermore, if you have earned any interest on the annual tax return, then you must provide the declaration of the same.

No immediate lending of cash

Till the time the cash is lent out, it will not be online and so most of these platforms will be working towards deploying the cash as fast as possible. But the overall effect on such returns is likely to be very less in the long run.

Conclusion

From the above statements, it is very clear that P to P platforms are an excellent way to receive loans at lower interest rates and at a faster pace. Also an excellent method for those who want to earn higher returns on their investments. Considering the risk factors associated with these kinds of platforms it can be said that there is no business in the market that does not come with any kind of risk and as we proceed further with the appropriate business plans we can surely earn a higher rate of interest with fewer risks.

Unlike the transparency situation in the banks, this platform offers complete transparency to the lenders who are considered to be very important. Therefore for those who are planning to initiate or set up a non-banking financial company, online P2P lending is the best option available. 

References


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