Just like an online marketplace brings buyers and sellers on a single platform to transact, P2P lending marketplace brings borrowers & lenders together. P2P lending is a crowd-funding model where people, looking to invest their money & people who want to borrow can do so. Their website lists multiple borrowers under different risk categories, with varying interest rates. Borrowers are either individuals or small businessmen whose loan applications have been rejected by banks.
Global cumulative lending through P2P platforms at the end of Q4 2015, had reached Rs. 38,200 cr from Rs. 19 cr in 2012. And up until April 2016, there were around 30 start-up P2P lending companies in India. RBI feels that although P2P lending platforms are still at a nascent stage in India and are not of significant value yet. But the potential benefits they offer to their stakeholders and their associated risks are too important to be ignored.
At present, it is partially or fully regulated in many western countries like US, Australia etc. China has the largest P2P market in the world, with hundreds of platforms offering diverse services, but the sector is not regulated currently.
Government of India understands the imperative need for affordable credit specially for MSMEs and is giving impetus to NBFCs to ensure that the gap is bridged. This means that faster and easier loans are available at cheaper rates through NBFCs.
P2P Lending firms typically charge their lenders one-time registration fee, or they charge based on the amount lent. Lenders are allowed to choose from among a set of borrowers on the platform and can diversify their risk by lending to multiple borrowers.
These firms often follow a reverse auction model in which the lenders bid for a borrower’s loan proposal and the borrower has the freedom to either accept or reject the offer. This way borrower’s confidence gets a lot of boost, when he sees that multiple parties want to extend a loan or invest in his enterprise/ new business model. But as a borrower, due diligence must be exercised to determine whether the cost of borrowing is reasonable.
A low risk borrower is likely to get an interest rate of 12-13%, while a high-risk borrower can get a loan at 25-30% interest rate. Multiple lending opportunities offered over these platforms are likely to give greater return on investment than a saving bank and fixed deposit account would give. However, these investments are very risky as they are unsecured loans.
These firms assess their borrowers on basis of credit scores, banking details and income tax returns. They assign a greater weightage to social behavior than to credit scores. This social behavior is then extrapolated to financial behavior. Furthermore, these firms also help in following up for repayments and assist in recovery process as well.
P2P firms facilitate documentation for lending and borrowing. Loan is transferred from lender’s bank account to borrower’s bank account. These firms facilitate collection of post-dated cheques drawn up by the borrower in the name of the lender. These cheques are proxy security for loan repayment.
RBI Regulations for NBFC – P2P Lending activities
Seeing the pivotal role P2P lending were likely to be playing in the near future, RBI came out with a set of regulations that will govern this sector. Only entities that are registered under the Companies Act can get a P2P registration from RBI
- Companies registered as NBFC-P2P shall have a net owned fund of at least Rs. 2 cr unless a higher amount is specified by RBI
- NBFC shall only act as an intermediary/facilitator between borrower and lender and cannot mobilize deposits or give loans on its own
- They cannot provide credit enhancement or credit guarantee schemes
- They cannot facilitate or permit any secured lending linked to its platform; i.e. only clean loans will be permitted
RBI Regulations: NBFC – P2P Prudential Norms
- Leverage Ratio of not more than 2 shall be maintained
- Aggregate exposure of a lender to all its borrowers, at any point in time, across P2Ps, shall not exceed more than Rs. 10,00,000
- Aggregate loans taken by a borrower, across P2Ps, at any point in time, shall not exceeded more than Rs. 10,00,000
- Exposure of a single lender to a specific borrower, across P2Ps, shall not exceed more than Rs. 50,000
- Maturity of the loans shall be less than 36 months
- They must undertake due diligence on their participants including credit assessment and risk profiling of borrowers. This information must be disclosed to their prospective lenders
- NBFC-P2Ps shall adopt the loan recovery practices from other NBFCs. There should be proper redressal mechanisms for complaints. Funds should be directly transferred from lender’s bank account to that of the borrower’s.
The growth of digital transactions, recent fintech innovations and the increase in demand for affordable credit has been the driving factor for growth in NBFCs and P2P lending platforms in India. Its recent inclusion under RBI regulatory lens has put the sector on exponential growth trajectory. Considering that these firms are likely to be grow to $4-5 billion by 2023, this lending segment has completely disrupted the lending and asset class categories in India.