Short on funds? You no longer have to run around asking your friend, relatives, or colleagues for money.
What is P2P lending?
Similar to e-commerce websites such as Amazon and OLX, a P2P platform is a marketplace for money lending activities. “Individuals can lend money to others where the lender and the borrower are matched using online services. Lenders can go through profiles of people looking for money and offer an amount to whichever individual or business that they find most promising,” explains Aditya Kumar, founder and CEO, Qbera.com, a fintech startup offering unsecured personal loans.
The borrower can either be an individual or a legal person requiring a loan.
Who does P2P lending suit?
While banks and non-banking finance companies (NBFC) are the readily available sources for loans, who does the P2P platform cater to? “Unfortunately, banks in India follow mediocre credit assessment policies which are suited only for borrowers who can offer collateral or have an impeccable credit history.
In practice, majority of the borrowers lie in between these extremes. Therefore, majority of Indians can borrow on P2P platforms,” says Raghavendra Pratap Singh, co-founder, i2ifunding, an online P2P lending marketplace.
“One of the main reasons that borrowers go for P2P lending is the fact that they may get financing which they wouldn’t have gotten approval for by standard financial institutions. The middleman is removed from the process. The application process is also easy and quick unlike banks and NBFCs which take 4-7 working days to disburse a loan,” says Kumar.
Rates on offer
Someone eligible for a loan from banks at a lower interest rate would generally not use the P2P platform unless a quick disbursal is what is needed or he or she is getting it at a much lower rate. Borrowers rejected by formal banking channels according to Mukesh Bubna, founder and CEO, http://www.monexo.co, an online P2P lending marketplace, “are currently served by NBFCs such as Fullerton and Bajaj Finance and can be charged anywhere from 15 per cent to 40 per cent. We believe in risk-based pricing and determine the interest rate for a borrower from 13 percent up to 30 percent.” Interest rate charged by banks could be in the range of 11-18 percent per annum.
How is the interest rate determined?
Unlike in a bank, where the interest rate is largely a function of the cost of funds of the lender, in a P2P platform, the borrower’s profile decides the interest rate at which the money can be borrowed. Bubna says, “Pricing is determined based on risk associated with the borrower and so we determine the interest rate for a loan based on our proprietary scoring and pricing parameters.” Every platform will have its own pricing and scoring pattern for the borrower. Therefore, compare rates across P2P platforms before finalising where to borrow from.
Who is eligible to borrow?
The eligibility norms may vary across P2P platforms but they mostly restrict it to individuals with earn a salary. Having the salary credited to bank account, having an email account, and a mobile number may just be some other pre-conditions for borrowing on these platforms. Check the minimum income criteria and the borrowing amount before you proceed.
Credit score has become an important tool for banks while disbursing loans. However, those with no credit score or a low score could face issues. “Banks take a very narrow view of ‘good’ borrowers, i.e., CIBIL score of 750+ and have a category A, category B and category C list of companies. This has left a large part of individuals not able to access credit,” says Bubna. P2P lending websites, therefore, offer a platform to those with low credit scores.
Even those with high credit scores may take advantage of these platforms. “Borrowers with good credit profile can borrow as low as Rs 25,000 even for 6 months and could prepay the loan without any penalty. Banks don’t offer such flexibility,” says Singh.
“A high credit score of say closer to 900 means that the borrower has serviced previous loans and credit card dues properly, so that the lender feels that you are a safe borrower. Thus, you can get a higher loan amount at a lower rate. A borrower with around 800 or more credit score, needing a Rs 7.5 lakh loan would be better of approaching a bank than a P2P lending platform,” says Kumar.
What are the restrictions?
RBI has put a cap on the amount that can be borrowed and lent. The aggregate exposure of a lender or the maximum that one may borrow at any point of time, across all P2Ps, shall be capped at Rs 10 lakh. Even the exposure of a single lender to the same borrower, across all P2Ps, shall not exceed Rs 50,000 and the maturity of the loans shall not exceed 36 months. “More clarity from RBI is expected on how the regulator intends to monitor the compliance of this aspect and how it will fix the responsibility,” says Singh.
What are the charges?
Make sure the charges are clearly defined and are stated in the tripartite agreement between the P2P platform, lender, and the borrower. Some of the charges could be:
o Account opening fee
o Entry fee
o Investing and reinvesting fee
o Repayment collection fee – A percentage of monthly repayment collected from borrower
o Exit / withdrawal Fee – A percentage of the amount withdrawn from escrow account
o Registration fee
o Listing fee / account opening fee
o Borrower fee – A percentage depending on one’s rating
o Prepayment charges
o Loan processing charges
Risks for a lender
Since this is an unsecured loan where there is no face-to-face interaction, a P2P lender needs to be aware of the risks involved. Bubna says, “All investments involve risk. However, in comparison to equity or commodity market investments or real estate, P2P lending has lower risk as it is addressed by on-boarding high quality borrowers. Further, lenders are suggested to create a diversified portfolio of loans.”
Risks for a borrower
For a borrower who intends to default, it is definitely not a good idea. “Defaulting borrowers can end up hurting their credit scores thereby lowering their chances of securing loans in future. Plus, there can be steep penalties for delaying or defaulting on the payment and it may involve a long drawn litigation process,” informs Singh.
In case of default
As a lender, one would want the P2P platform to help in recovering the amount lent in case the borrower defaults. “Since the borrower is abided by a legally enforceable contract, he or she can be sued in the court of law,” says Singh. He adds, “For an additional fee, P2P platforms can offer you third-party legal opinion. The P2P platforms try to recover the defaulted amount, including steep penalties charged thereon by deploying their own human resources for no additional fees.” The P2P platforms have the recovery process in place and one should understand it before using the services of the platform.
P2P lending is a new mechanism and if properly conducted can bring in a huge amount of unorganised lending and borrowing into its fold. Further, a large chunk of borrowers with no credit history can be catered to by these platforms.
For the benefit of this industry and the individual bowers and lenders, the regulator needs to keep a close watch, track and take necessary action especially in the initial days to keep the unscrupulous activities out. The advertisement and promotional messages of P2P platforms needs to be strictly monitored and standardised. Those who are promoting this business on the lines of ‘assurance’, ‘capital protection’ etc may damage the reputation of the industry even before it takes off. A case in point is the life insurance industry marred with rampant cases of mis-selling especially in the initial days of the sector being opened up for the private sector.