Peer to Peer Lending

Peer-to-Peer Lending Interest Rates, Eligibility, and Benefits

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.

Peer to Peer lending

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.

Peer-to-peer lending: how does it operate?

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:

• A potential borrower can file an online application on the peer-to-peer lending platform if they are interested in borrowing money.
• Those borrowers who want to lend money open an account with a Peer to Peer platform as a lender.
• The platform evaluates the application & establishes the applicant’s risk & credit standing. The interest rate is then applied to the applicant.
• Upon application approval, the applicant or the candidate is given access to the various options of the investors depending on his credit score & allocated interest rates.
• The candidate or the applicant may consider each proposed alternative before selecting one.
• In addition to repaying the amount when the loan matures, the applicant or the concerned person is responsible for making periodic (often monthly) interest payments.
• Both investors & borrowers should pay a fee to the company running the internet platform in exchange for the services it provides.

Peer-to-Peer Lending Features

The main characteristics of peer-to-peer lending are listed below:

• Verified borrowers and investors are listed on online Peer-to-Peer lending platforms.
• It is not necessary for the lender and borrower to know each other. The platform for peer-to-peer lending will take responsibility.
• Peer-to-peer loans have tenure ranging from three to thirty-six months.
• Due to the large returns on their investments that P2P lending platforms provide, many lenders view them as a wise investment choice.
• Between the lender and the borrower, there is only an online peer-to-peer lending platform; no other financial institution is involved.

Interest Rates Charged by P2P Lending Platforms

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:

Peer-to-peer Lending Platform	Interest Rate	Processing Fee
LenDen Club	6.5% onwards	Rs.400 (plus GST) for loan amounts up to 10,000; 4% for a loan amount greater than Rs.10,000 (subject to a minimum of Rs.2000)
Faircent	9.99% onwards	2.5% to 8%, depending upon the amount and the tenure of the loan.
OML P2P	10.99% onwards	1% to 10%, depending upon the amount and the tenure of the loan.
Lendbox	12% onwards	2% to 6%, depending upon the loan amount.
i2iFunding	12% onwards	3% to 6% for salaried borrowers 4% to 8% for self-employed borrowers
i-Lend	15% onwards	4% of the loan amount.

Eligibility Requirements to Start Peer-to-Peer Lending Platform in India

The following are the eligibility requirements to obtain a peer-to-peer lending licence in India:

• A company must first get a Certificate of Registration in accordance with the provisions of the Companies Act 2013^[1] in order to apply for a Peer to Peer Lending License in India.
• A company that wishes to obtain a Peer-to-Peer Lending License in India must have the NOF (Net Owned Funds) of at least Rs 2 crores.
• If a company or business entity was already operating this type of business before obtaining a Certificate of Registration was made necessary, in that case, such type of Company will fulfil all the requirements prescribed and laid down by the Reserve Bank of India. 

Benefits of Peer-to-peer lending

Both borrowers and lenders can benefit significantly from peer-to-peer lending in the following ways:

• Greater returns for investors: Compared to other investment kinds, P2P lending typically offers investors larger returns.
• Easily accessible: Peer-to-peer lending is a more readily available source of capital for some borrowers than traditional loans from financial institutions. It could be brought on by the borrower’s poor credit standing or the loan’s unusual purpose.
• Reduced interest rates: Due to greater lender competition and fewer origination fees, P2P loans typically have lower interest rates.
• User-Friendly Experience: The application process is incredibly simple and quick, given that the peer-to-peer lending system is run on web portals. Also, lenders have access to the borrower profiles and can select borrowers based on the personal information that the borrowers have mentioned on the platform.
• Suitable for Those with a Bad Credit Background: Platforms for peer-to-peer lending can benefit borrowers with a bad credit history and low credit scores. These borrowers need to be qualified for loans from banks or NBFCs in the formalised sector. Platforms for peer-to-peer lending can be beneficial for these borrowers.
• No Collateral or Security is Necessary: Peer-to-peer platforms that offer unsecured loans do not ask borrowers to furnish any security or collateral.
• No early payment fees: Certain platforms don’t charge any fees or penalties when borrowers prepay their loans. It keeps your borrowing costs low while ensuring you do not experience additional financial hardships. 
• Increases credit score: One of the most practical methods to raise CIBIL score is P2P lending. Repaying it within the selected period can raise one’s CIBIL score because this is an excellent choice for borrowers with bad credit. 

How Is Peer-to-Peer Lending Regulated In India?

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.

Conclusion

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 India
Peer to Peer (P2P) Lending in India
Peer to Peer Business Lending in India & Abroad (P2P Lending)