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People have a culture of lending money to one another in India. It could be in the form of extended families aiding one another in times of need or in business communities where people borrow money to meet working capital requirements. Technology is transforming this conventional method of lending, just like it is transforming every other part of our life. Peer-to-peer lending, often known as P2P lending, is the new contemporary form of lending to one another.
Peer-to-peer lending (P2P) is an innovative way to borrow money and make investments without the help of traditional financial institutions. Borrowers and lenders can conduct profitable business without a bank acting as a middleman by using online platforms. This blog will discuss peer-to-peer lending, interest rates, eligibility, and its benefits.
Table of Contents
Peer-to-peer lending is a type of direct lending where funds are given to people or businesses without a formal financial institution acting as an intermediary. Peer-to-Peer lending is often done using online marketplaces connecting lenders and potential borrowers.
Both secured and unsecured loans are available through P2P lending. However, unsecured personal loans make up the majority of loans in P2P lending. Secured loans are uncommon in this sector and are typically secured by expensive items. Peer-to-peer lending is regarded as an alternate form of funding because of a few distinctive features.
Lending between individuals is a relatively simple process. An internet platform designed for this purpose is used for all transactions. The general Peer-to-Peer lending procedure is outlined in the following steps:
The main characteristics of peer-to-peer lending are listed below:
Peer-to-peer (P2P) lending is a high-risk type of lending because most of the borrowers on these platforms are people who are not qualified to receive a loan offer from the formalised sector, which includes banks and NBFCs. As a result, these platforms charge significantly higher interest rates and processing costs. To gain an idea of the interest rates and processing costs levied by the peer-to-peer lending platforms, you may refer to the following table:
The following are the eligibility requirements to obtain a peer-to-peer lending licence in India:
Both borrowers and lenders can benefit significantly from peer-to-peer lending in the following ways:
Since P2P is a form of lending, it comes under the purview of the Reserve Bank of India (RBI). The RBI has established rules for how P2P lending services must operate. For example, any business that wants to provide P2P lending services must apply for an NBFC-P2P licence with the RBI.
RBI has to ensure that these platforms pose no significant systemic risk as a regulator. According to RBI regulations, the company’s board will follow a previously determined Business Continuity Plan if a P2P platform decides to shut down. The strategy includes every detail needed to safeguard the data of all lenders and borrowers. The plan provides further details regarding debt servicing for the duration of the loan in the event that the platform is closed.
These are just a few of the many regulatory measures the RBI has implemented to lower the risks associated with peer-to-peer lending. Despite this, investing in P2P lending carries some risk. It is one of the riskier investment options.
The Master Direction for NBFC Peer-to-Peer Lending Platform, published by the RBI in 2017, govern P2P lending. With RBI approval, only an NBFC may register as a P2P lender. The RBI should issue a certificate of registration to each P2P lender. Every currently operating NBFC-P2P that is not a bank must register with the Mumbai-based Department of Non-Banking Regulation. Also, the P2P must fulfil additional requirements set down by the RBI and have a net owned fund of at least $20 million. P2P lenders must maintain a leverage ratio that is not more than 2.
Because loans are readily available on P2P lending platforms, and there are few restrictions for collateral, more market participants and borrowers are using these services. Nonetheless, all platform activities must be carried out in accordance with all rules, including those listed in the Master Directions. Due to the rise of P2P platforms, there is a greater need to regulate these platforms through additional laws and regulations.
Also Read:All You Need to Know about Peer-to-peer Lending in IndiaPeer to Peer (P2P) Lending in IndiaPeer to Peer Business Lending in India & Abroad (P2P Lending)
I am a driven and meticulous professional who completed B.Com BL (Hons) from Tamil Nadu Dr. Ambedkar Law University and completed Master of Laws in specialization (Criminal Law with Cyber Crimes). I have extensive experience in Criminal Litigation and want to utilise my legal knowledge in writing also I have proficiency in writing legitimate content with comprehensive research. My core areas of interest are Business Law, Intellectual Property Rights, and Cyber crimes.
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