Peer-to-peer or P2P2 lending has gained traction among people following the news of fintech companies such as Cred and BharatPe venturing into the P2P segment.
P2P lending is not risk-free, but it allows for higher returns for the lenders and lowers the interest rates for the borrower, making it favorable to both. It is a market where buyers and sellers meet.
To find out more, let’s dive in!
What is the P2P loan?
P2P is an online platform that provides flexibility for lenders and borrowers, as well as a variety of lending and borrowing options. The P2P model brings lenders and borrowers together, making it easier to match lenders and borrowers.
Borrowers can get funds at a cheaper interest rate than banks, while lenders can earn higher interest than bank deposits.
P2P business model
In the days of covid-19, we saw many small organizations registering with online crowd platforms to raise money to help those in need. They are not obligated to return the funds to the donating public. On the other hand, peer-to-peer lending is a device that connects individuals in need of loans with individuals willing to lend.
It acts as an intermediary or a channel between the lender and the borrowers and facilitates the process of booking a spread. An individual or a company can register as a borrower or lender on P2P platforms after providing the necessary documents.
Previously, P2P lending companies were not recognized as NBFCs, but in 2017, at the end of September, RBI proposed “Non-bank financial corporation – Guidance of the peer-to-peer lending platform (reserve bank), 2017”, In which the central banking institution established a list of instructions relating to the registration and operation of NBFC-P2P.
According to RBI guidelines, “Peer to Peer Lending Platform means an intermediary providing loan facilitation services to participants through online or other support.”
“The Reserve Bank of India, when satisfied that it is necessary to do so, in the exercise of the powers conferred on it by … the Reserve Bank of India Act 1934, (2 of 1934) with the approval prior to the government, hereby specifies a non-bank institution that operates a peer-to-peer lending platform to be a non-bank financial corporation ”, states the notification sent by RBI to the government (in 2017).
“P2P lending promotes alternative forms of finance, where formal finance is unable to reach and also has the potential to ease lending rates due to lower operational costs and increased competition with traditional lending channels. . If properly regulated, P2P lending platforms can do it more efficiently, ”apex bank said in the document.
Unlike traditional banking and financial institutions, the P2P model is a new generation credit model to meet current business credit needs. Faircent, Paisadukaan, Finzy, Rupeecircle are some of the P2P lending platforms. The latest development in the sector is the entry of BharatPe and Cred.
Also read: List of Top 10 P2P Lending Startups in India
Individuals, High Net Worth Individuals (HNI), Hindu Undivided Families (HUF) and other non-bank entities can use P2P loans to pool their savings.
An auction is held under the P2P business model, in which a lender can submit an offer for a borrower’s loan requirement, which the borrower can accept or reject. Moreover, the platform can provide services like loan collection etc.
The interest rate ranges from 10% to 28% and it must be repaid in 3 months to 36 months. In the case of Cred, those who invest in this platform will earn interest of around 9%, while they will be paid 12-13% interest.
Once the borrower and lender come to an agreement, they digitally sign a legally binding contract. After that, the agreed loan amount is transferred to the borrower’s account which he has to repay periodically within a specified time, just like IMEs. If the borrower does not repay EMI within a specified time period, a penalty is imposed on the borrower which is directly payable to the lender.
Determining factors before granting loans
In the traditional loan system, a credit score determines the creditworthiness of a borrower. In the case of P2P platforms, they have their parameters to check the creditworthiness of borrowers.
Some of the metrics include employment, income, credit history is retrieved using technology, borrower habits are tracked through tracking social media activity, app usage, etc. .
These details determine the ability of a borrower to repay the loan and in what period, in short, the creditworthiness and then these platforms place them in different risk categories.
Are P2P lending platforms safe for investing?
P2P platforms are typically used by people who do not get loans from traditional lenders such as banks, stating that they do not meet the preconditions of the bank. Hence, lending to these borrowers comes with a significant risk as these loans are unsecured.
In the event of default by the borrower, the P2P platforms do not ensure the full repayment of the principal or the interest thereof.
But, according to the main publication, in the event of a default, these platforms help in the recovery and filing of the legal opinion, but do not guarantee its success.
It should be noted that according to the rules prescribed by RBI, no P2P platform can hold the funds invested by the lender or reimbursed by the borrower. These funds must be held in the custody of a third party until the specified condition is met.
Overview of the Indian Peer-to-Peer Loan Market:
The Indian government’s push towards cashless technologies has been a major attribute of restructuring the financial sector, breaking the monopoly of traditional institutions like banks.
Online P2P lending is estimated to hold a majority stake in the P2P lending market with a share of 97% in 2020. The report said, “Digital operations for P2P lending platforms ensure that the necessary overhead costs are met. to maintain and staff a physical establishment are bypassed. . This benefit can be passed on to the borrower in the form of lower interest rates and processing fees. Additionally, online loan platforms provide relatively faster loan processing than traditional loan platforms due to minimal paperwork. “
According to the Cambridge Center for Alternative Finance, Fintech credit reached $ 364 billion in 2019, compared to $ 11 billion in 2013 worldwide.
Real estate application is also expected to grow at a CAGR of 25.7% during the forecast period 2021-2026. The real estate industry sees peer-to-peer lending as the second best alternative to traditional financial institutions.