The Types of P2P Lending
1. Consumer lending
small personal loan for example cars, family or self-weddings, holidays or home repairs or repayment of credit card dues.
2. Small business Lending
SME loans under P2P Lending provided to small business for Working capital, Business expansion, and Asset finance. Generally, founders offer a personal guarantee against the loan.
3. Property Lending
This is secured P2P lending against the 1st charge of the commercial or residential property. The loan is borrowed for personal mortgages, Buy-to-lets, Residential refurbishment, and developing commercial loans
Procedure for Peer to peer lending license
Any entity desirous of commencing the business of and being registered as a Private limited company or public limited company shall apply to RBI for the license (CoR) and must also fulfill the following two forms:
- Company should be registered in India as Private limited or Public limited with the principal objective of financing
- Minimum net owned funds of INR 2 crores.
- The online application is available on RBI's website (COSMOS).
- Submission of hard copy of the application along with attached documents shall be submitted RBI Office.
- The license will be granted only after vigilant inspection of the application and documents attached with it.
Check list for Peer to peer lending license
The P2P Lending platforms come under the purview of Reserve Bank of India taking the definition of NBFCs under section 45I(f)(iii) of the RBI Act.
The various pillars governing the regulatory framework are:
- Permitted Activity: Still in its infant stage, the P2P platforms could be registered only as an intermediary, with the role of bringing the lender and borrower together without reflecting the lending and borrowing in its Balance Sheet. The leverage to provide any assured return shall be prohibited. The funds shall directly be transferred into the Borrower’s account from the Lender’s account to escape the threat of money laundering. The FEMA guidelines shall also be observed in the case of any cross-border transactions.
- Prudential Requirements: A minimum capital of INR 2 crore is required.
- Governance Requirements: It includes fit and proper criteria for promoters, directors, and CEO. The Board must also consist of a reasonable portion of members having a financial background. A physical place of business is also required to be established in India, with the management primarily based in the country.
- Business Continuity Plan: Adequate risk management policy shall be put in place by the platform acting as the custodian of cheques and agreements.
- Customer Interface: Since the platform uses the data of the customers to assess their credibility, it is the duty of the portal to safeguard their information in the first place. Their operations shall be transparent, the data confidentiality shall be maintained. There shall be no false promises regarding extraordinary returns.
- Reporting Requirements: these online entities are required to submit regular reports based on their financial position, loans arranged in each quarter, complaints received in each quarter etc. to the Reserve Bank.
When we are clear about the regulatory framework working around the P2P lending, let's take a look at the advantages it offers to the lenders and borrowers
What is Online Platform Fees under P2P lending
Both the lenders and the borrowers pay pre-decided fees to the lending platform. The borrowers pay origination fees at either a flat rate or as a percentage depending upon the amount of loan raised by them. The origination fees as stated above also depends upon the risk category associated with the funds raised by them. The lenders generally pay administration fees. If they choose to avail any other services provided by the platform, such as advisory, risk analysis, etc., then, an additional fee are also required to be paid by them.
Role of the Online Platform
The platform provides services such as collection of the loan repayments from the borrowers, assessing of borrower’s credit-worthiness etc. The fees collected by the platforms are generally incurred in facilitating the above-mentioned services or to pay the general business expenditures. As in the case of general financial intermediation, the online platform does not earn from the spread between the lending and deposit rates. Rather, they make a profit from arrangement fees and from the credit scoring of the borrowers.
Regulator of the P2P lending
While most of the crowd-funding- be it, equity, debt or fund based, fall under the purview of the capital market regulator-SEBI, the P2P lending is regulated by Reserve Bank of India. Different jurisdictions of the world treat P2P lending differently. In some countries, they are identified as banks while in other countries, they are treated as intermediaries. This drags us into understanding the global scenario circumventing the P2P lending across the world.
The Global Scene
In countries such as Israel and Japan, the P2P lending is completely prohibited. Certain countries such as Australia, Canada, UK treat them as the financial intermediaries. In China, Egypt, South Korea, P2P lending is not regulated and is considered as the exempt market due to the lack of definition. The P2P lending is treated under the Banking Regulation in the countries such as France, Germany, and Italy. In the United States, the concerned is treated in the dual phase-one at the central level and other at the state level.
The Indian Picture
In India, many online P2P lending platforms are present. Some of them are focused on the activities related to micro finance, with the primary objective of social impact and providing easier credit to small entrepreneurs. They provide access to online platform bringing the lenders and the borrowers together. In P2P Lending, borrowers are being provided with lower rates than those offered by money lenders in the unorganized sector. Lenders earn higher returns than what traditional investment opportunities offer. Interest rates charged on the loans vary from one platform to other ranging from a flat interest rate fixed by the platform to dynamic interest rates as agreed upon by the borrowers and the lenders.
P2P Working Model
The P2P lending platforms are huge Fintech Companies registered under the Companies Act. They help in creating the match between lenders and borrowers. After registering the borrower within itself, the platforms perform the task of their credit assessment. Only those candidates, who fulfill the due diligence test with the platform are allowed to take part in the borrowing and lending process. The platforms also provide certain additional services such as credit assessment, risk analysis, recovery etc. Even the documentation for the lending and borrowing is facilitated by the online portal.
Peer to peer lending Advantages for borrowers
- Low-Interest rates: The borrowers can avail the benefits of lower interest rates as compared to banks and credit cards. Some case has witnessed a reduction of about 35% in the interest rates.
- Fixed Rate of interest: the platforms provide the leverage of fixed rate of interest even in the case of late payments, thereby, acting as a lucrative option in the hands of the borrower.
- Simple and fast application: the customers are provided with exclusive digital experience facilitating rapid flow of transactions.
- Lower Fees: the platform charges lower fees as compared to other modes of finances. Moreover, no penalty is attracted on pre-payment.
Peer to peer lending Advantages for lenders
- Higher Returns: the returns offered to the investors are generally higher, depending upon the type of risk you undertake.
- Diversification: Investors are open to a wide variety of options available to put their capital into.
- Direct communication with the buyer: the platform provides the lenders with the option to directly communicate with and finalizes their deal with the borrowers.
The Other Side of the coin
- Whether the credit rating assessment done by the platform is reliable or not, is a concern. Therefore the risk associated is not certain.
- With the P2P industry still in its nascent stage, it would be too early to reach a definitive conclusion.