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Everything About NBFC – P2P

Mani Dahiya Mani Dahiya | Fintech Compliance Professional | Updated

Peer-to-peer (P2P) lending platforms offer themselves a simple key to borrow money for short-term necessities. This shall include buying consumer electronics, medical emergency, business loan, home renovation, repay credit card dues, travel loan, or any other such requirements.


It is quite feasible to borrow from P2P lending platforms when compared to conventional personal loans from banks and NBFCs as process and payment of the loan amount is speedy at P2P lending platforms as compared to applying for a personal loan from the bank. 


There are mid-age salaried and self-employed individuals who are involved in lending on P2P platforms to earn huge returns by taking higher risks as compared to financial assets that involve mutual funds, equities, etc.


The reason behind this is that for every borrower, there has to be a person on the other side wanting to lend and earn an interest. 2018 has been the year that showed major growth in P2P lending, in the month of January overall P2P lending was in the range of Rs five to six crores and at the end of December, it increased to Rs twenty to twenty-five crores. The reason for such a  high raise in lending is that after being governed by the RBI then receiving the NBFC status and the knowledge of the alternate mode of lending and borrowing amongst the consumers, the P2P platforms have witnessed a high paced growth.
What do we understand by P2P lending?


P2P lending platform is a way of connecting borrowers with individual lenders, who come together to meet the borrowers’ loan necessities. Such, borrowings from Peer to peer platforms are unsecured loans and interest rates are greater for borrowers as compared to banks and Non Banking Financial Companies. Some of the examples of P2P lending platforms are Faircent, OMLP2P, Lendenclub, Cashkumar, Rupeecircle, Lendbox, etc.


The amount for borrowings and term of the loan are different for P2P companies. For example, on OMLP2P platform, borrowers can call for loan amounts between Rs twenty five thousand to Rs ten lakhs. The minimum loan term is three months and the maximum thirty six months.


Regulations of P2P lending platforms

  1. The Reserve Bank of India governs the Peer to peer lending platforms to protect the interest of the lenders as well as the borrowers. In October of 2017, the Reserve Bank of India made it compulsory for all Peer to Peer companies in operation to apply for a license in order to keep operating as a P2P platform.
  2. All the new comers had to get a provisional NBFC-P2P license from Reserve Bank of India to start operations in this area. This made sure that the entire operational Peer to peer players are either governed or are waiting for a license from the regulator. The P2P players needed governance by the Reserve Bank of India to ensure that they follow the specified rules in lending and borrowing.
  3. In the prescribed guidelines, the Reserve Bank of India has maintained a cap on lenders and borrowers on the P2P platform. Any lender cannot invest more than Rs ten lakhs across all P2P platforms. Similarly, a borrower cannot borrow more than Rs ten lakhs across P2P platforms. A lender cannot lend more than Rs fifty thousand to the same borrower across P2P platforms, at any point of time.


How to get started for borrowing and lending?

To register as a borrower, you need to register on Peer 2 Peer platform by filling an online application form, pay the non-refundable one-time registration fees of Rs hundred to Rs thousand and upload the scanned copies of documents. P2P players may also seek borrower’s social media profile links to assess profile, social behavior, job stability and other relevant points.

  1. Once the registration is completed, P2P risk estimation team verifies your profile and estimates risk profile. If qualified, the borrowers' profile will be listed with the prerequisite of the loan amount on P2P platform.
  2. To begin with the lending process the person is required to register on P2P platform with your email address, mobile number and an identity card and bank account statements.
  3. These are certain of the compulsory prerequisites of P2P platforms. On P2P platform lenders team shall sanction the account after verification within one working day. After logging into P2P account one can begin with the process of lending.
  4. In case the details provided are inadequate or unfit to borrow as per the standards set by them the registration can be turned down by P2P platform for borrowing and lending. 

 

Benefits and drawbacks

  1. The advantage of P2P lending is that the process is simple to begin borrowing and investment using this platform. Lending can be done with a minimum amount of Rs. Five thousand. This P2P lending platforms also provide scrutiny of borrower’s profiles that helps in simple decision making before lending.

 

  1. The main disadvantage of lending on Peer 2 Peer platforms is losing the capital in case of default of the borrower. For example, the default rate is one point nine four percent on Rupee Circle and it will vary on P2P platforms based on strict internal terms and conditions.

 

  1. To decrease the default risk you must expand your lending to many borrowers. Always verify the debt to income ratio of the borrower while selecting. To evaluate debt to income ratio, consider your borrower’s total debt in a month and monthly income. For example, your borrower’s existing debt per month is Rs twenty thousand and monthly income is Rs sixty thousand, then debt to income ratio will be thirty three percent.

 

  1. Further, it’s important to spread the credit risk across multiple risk grades and tenures to minimize risks. Another threat is giving up your privacy by giving P2P player links of your social media profile.


Major risks of using P2P platforms

  1. Losing money because of fraud: There is a possibility to cheat an online lender by submitting loan applications with false identities to P2P platforms and form a profile for borrowing.
  2. Losing money because of P2P lending platform going bust: If in case one of the P2P lending platform is still in process of applying for NBFC-P2P license from the Reserve Bank of India decides to shut the operations, there is a considerable risk that you will not get all your money back from lending. RBI will break down on the P2P platforms with legal action to recuperate lenders money.
  3. Some of the P2P platforms that are not registered with the Reserve Bank of India claim guaranteed returns on lending in advertisements and websites. Consumers have to to be aware of these fake promises by such dicey lending business and losing the money.
  4. Losing money because of rising bad debts of the borrower listed on P2P platform: There is a possibility of borrower’s credit profile failing after being listed on P2P platform and raising money from several lenders.

 

Conclusion

The intrinsic problem with P2P lending platforms is that there is simple accessibility of loans, and most millennial are now borrowing for small requirements from these platforms and increasing risk to unsecured borrowings.

 

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