A comprehensive guide to Peer-to-Peer lending in India

What is the first thing that comes to your mind when you hear the word “loan”? In all probability, you think of a “bank” – an HDFC, SBI, ICICI or Axis Bank.
But of course, the banks are not the only places, which lend money for an individual’s or an organisation’s financial needs. Apart from banks, we also have non-banking finance companies or NBFCs such as Muthoot Finance, Sri Ram Finance, Fullerton Credit, Bajaj Finserv, etc.
In times of dire need, one would also tend to rely on friends/ family/ relatives for short-term borrowing.
And then there is yet another source for loans, which marries the best of all the above – quick access, easy documentation, flexibility of payment and competitive interest rates.
It is an upcoming and growing avenue known as Peer-to-Peer (P2P) Lending.
World over p2p lending has emerged as an opportunity not just for borrowers of loans but also for lenders as an investment. Countries such as UK and US have led the growth of p2p lending. Currently, China is the largest p2p lending market in the world, according to a recent Financial Express article.
India is just opening up to this new phenomenon. By 2020, the size of peer to peer lending in India is expected to be at Rs. 30,000 crores.
Why is peer-to-peer lending gaining so much ground?

The reasons are quite simple.
After the credit crisis hit in 2008, financial institutions including banks became cautious with lending. They did not want a repeat of the horrors of the credit crisis, which put them almost on the brink of bankruptcy.
Now as a result, lending was squeezed to the consumers. The borrowers were looking for alternative avenues to borrow money for their needs.
From an investor’s point of view too, interest rates were falling. They could do just as well by keeping money under the mattress and it would have hardly made a difference.
Stock markets too were on a downward roll. Not to mention their volatile nature and the associated risk and uncertainty, which again did not inspire any confidence in the investor.
The conditions were thus ripe for the emergence of peer-to-peer lending with the benefits it had to offer not just to the borrower but also to the investor or the lender in this case.
Enter peer-to-peer lending

Now all those who couldn’t get the banks to fund their credit requirements started to approach peer to peer lending platforms where they found reliable credit at much lower rates of interest than what a bank would offer to them.

On the other hand, investor’s trust in the banks was dwindling. They did not want to rely on banks anymore and wanted to handle their money by themselves. P2P lending platforms brought them the opportunity to do it.
It also offered an attractive investment option. P2P lending platforms enabled them to earn a better, inflation-adjusted, fixed rate of interest (even after adjusting for the fees and taxes).
What is P2P lending?

Think of P2P lending as the ‘Uber’isation of the personal loan and financing market.
Hitherto, individuals had to go to Banks or NBFCs to request loans and the banks would apply several criteria to evaluate a loan application. At the end of it, there were high chances that a loan application would be rejected for as simple a reason as a low CIBIL score.
With P2P, you just log on to one of the P2P marketplaces where individuals who are investors meet individuals who want to borrow money.
While individuals show their interest to lend and borrow, the P2P platform’s job is to match the borrower with the lender in line with their expectations of the amount to be borrowed, the interest rates and the time frame.
Benefits of P2P

One of the biggest benefits of a P2P platform is that they rely on comprehensive evaluation criteria for borrowers; it goes beyond the past information to understand demographics and future payment capacity.
This ensures that only credible borrowers are reflected on the platform yet giving an opportunity to a much larger section of borrowers to avail credit and loans.
Two, it dissolves geographical boundaries. An IT professional in Mumbai who needs money for doing up the house can end up borrowing from an P2P investor in Delhi/Bangalore.
Three, investors get access to an investment opportunity with the minimum risk and maximum benefit. They don’t have to suffer the volatile gyrations of the stock market or the poor post tax returns of Bank FDs.
The typical interest rate on a p2p platform ranges between 12% and 30%. Even on a post–tax basis, it remains a predictable source of cash flows and yet outpaces inflation.
Four, while there is a frequent mention of individuals, a p2p platform is an attractive source for small businesses too where they can borrow to fund working capital needs or take long-term loans.
Finally, the cost for investors as well as borrowers is competitive, which leaves a larger part of the returns in the hands of investors and keeps the rate of interest low for the borrower.
P2P in India and challenges ahead

P2P is a new phenomenon in India. Most of the players are yet to complete even 2 years. However, even in this small time frame, the concept has attracted significant attention.
That is the reason that even RBI has taken a proactive approach to give the necessary boost to the industry. It has come up with draft regulation guidelines to ensure that participants including the companies, investors and borrowers benefit from the use of P2P lending platforms.
P2P platform companies would have to adhere to RBI regulations related to minimum capital requirements, risk and credit profiling, operational guidelines, etc. as and when they are announced. P2P platforms too recognise the importance of this. An RBI affiliation helps bring greater credibility. They are now taking the necessary steps.
One P2P platform has already raised capital to meet the minimum requirements.
Banks, who are the established players, would also not like to be left behind. They are going to make the necessary changes to remain competitive in the eyes of the borrowers.
All said and done, P2P lending is here to stay. India has the potential to be the largest market for P2P lending. It remains to be seen how far the platforms are able to capitalise on this opportunity.
What does it mean for you?

P2P is definitely is a strong source of alternative credit for individuals and small businesses who would otherwise find it difficult to obtain loans. It deserves mentioning again that the reason is not always a poor credit profile but the limited way in which banks assess credit profiles.
You can direct anyone you know who is need of a loan to a P2P platform.
Moreover even you could test the waters with a P2P platform with an investment of as little as Rs. 5,000

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