The Reserve Bank of India has introduced the rules and norms that would govern the P2P lenders and has also capped the aggregate exposure of a lender to all borrowers at a time at Rs 10 lakh and aggregate loans taken by a borrower at a time at Rs 10 lakh. What is P2P Lending or Peer to Peer Lending? How does P2P platform work? P2P companies in India? What are RBI guidelines?

P2P Lending

Peer-to-peer lending, also abbreviated as P2P lending, is the practice of lending money to individuals or businesses through online services that match lenders with borrowers The P2P companies provide a platform or market for borrowers and lenders. This results in varying interest rates for borrowers, i.e., return for the lenders.

• Lenders have to register to use the platform. Some P2Ps charge a one-time registration fee while others earn their revenue based on how much is lent.
• Borrowers too have to register. They are listed on these platforms under different risk categories, and the interest rates vary for each category. They are charged a registration fee and a processing fee too after they get a loan, which depends on the amount and term for which the loan is borrowed. They have to pay the agreed-upon interest on the loan.
• The P2P platform matches lenders and borrowers based on a lender’s risk-taking ability and a borrower’s creditworthiness. This results in varying interest rates for borrowers, i.e., return for the lenders.
• These platforms also use alternative credit scoring metrics, besides credit scores from credit bureaus.

Many lenders find P2P platforms attractive because of their potential for giving higher returns, compared to fixed and savings bank deposits.It is important to note here that these platforms cannot guarantee any return. They are only a regulated intermediary between lenders and borrowers. And as the loans are unsecured, if a borrower defaults, the entire loss is borne by the lender.

As a borrower who is unable to get a loan from banks or traditional NBFCs, the P2P platforms at least give an opportunity to borrow. 

As a lender, if you lend in these P2P platforms, the risk is entirely yours. In most cases, the P2P platform does not even bear the legal expenses in case a borrower defaults.

The Video below, from One Minute Economics, explains in 1 minute what is P2P Lending? The image below shows how P2P lending works . Ref i2ifunding.

How P2P lending works?

P2P Peer to Peer Lending

Is P2P Lending Popular?

• In the US, LendingClub did consumer-lending transactions worth $8.4 billion in 2015 while OnDeck did $1.9-billion worth of transactions for small business lending.
• In the UK, market leaders like Zopa and FundingCircle did $800-million worth of transactions in 2015.
• The largest alternate finance market was China, where Internet finance market leader CreditEase alone clocked $15 billion in transactions, and the top five players did $56.4 billion.

In India, this number is small but growing rapidly. Recent reports have said that India has emerged as the third-largest alternate lending sector in the world, followed by the US and China. There are close to 100 fin-tech startups in India, and they attracted close to $180 million funding in over 20 deals.

P2P Lending Companies in India

Till April 2016, there were around 30 start-up P2P lending companies in India. Some P2P Lending Companies in India are:

• Lendbox
• i2i Funding
• Faircent
• LoanTap

RBI Guidelines on P2P

In Sep 2017 RBI announced that Peer-to-peer lenders will be treated as non-banking financial companies (NBFCs).  With recognition as NBFCs, these companies can share credit information with the credit bureaus.

• For lenders, this means they too can take more informed lending decisions.
• Borrowers now have an opportunity to build his credit history. The sharing of a borrower’s track record would reduce the risk of P2P platforms’ misuse. While the P2Ps can resort to legal action if a borrower defaults, the fact was that the defaulting behaviour was not recorded in credit history; and there was a chance that a defaulting borrower could try to borrow from other sources.

The new guideline from RBI, lays down clearly that the Peer to peer (P2P) lenders can collectively lend a loan of Rs 10 lakh at the maximum and individually have an exposure to a borrower not exceeding Rs 50,000.

It was only recently that the government of India had allowed the RBI to regulate the P2P lenders as non-banking finance companies (NBFCs). P2P lending is a model which is mainly online. In this model, the people invest their money with people who wish to borrow money. This model helps the savers to get the benefit of a high interest as they lend their money and not go for saving, and the borrowers get a lower interest rate relatively.

According to the business news, the P2P lenders can only lend loans that are unsecured which means that they will not be permitted to take collateral against the loans they lend. The circular reads that the maturity of the loans must not go beyond the time period of 36 months. It will also be required for the P2P to get a certificate from the borrower or lender that they are sticking to the asked limits.

As per the other Prudential Norms, the NBFC-P2P will maintain a Leverage Ratio of not more than 2. Also, the NBFC-P2P must:

• Take on due diligence on the participants
• Take on the credit assessment and risk profiling of the borrowers and let their lenders know
• Undertake loan agreement documents along with other related documents
• Assist disbursement and repayments of loan amount
• Provide services for loans recovery

An NBFC-P2P will be acting as intermediary which will provide an online platform to the participants of P2P lending and will not raise deposits or lend. It will also allow a secured lending and not allow international flow of funds. They can’t arrange any credit enhancement or credit guarantee and will also not hold on its own balance sheet funds received from lenders or borrowers. Other than a loan-specific insurance plan, it cannot cross-sell any other financial product.

More than 80% of the guidelines are like the non-banking company’s rulebook. The players hope the RBI to increase the cap after a period of time. The P2P lenders will have to apply for a certificate of registration with the RBI within three months. In case their application gets disapproved, the platform will have to close its business.

Also, as per Indian legal news, the Fund transfers between the participants on a P2P platform will happen through an escrow account, functioned by a trustee. At least two escrow accounts will have to be maintained, one for funds from lenders and pending disbursal, and the other from borrowers.