P2P Lending – Poised to redefine the credit scenario in India

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Is P2P lending a new concept in India? The name might be new, but the idea is not. You find P2P lending in almost every village and town in India. Even today, villagers in India trust the moneylender more than the banks. The prime reason is that the moneylender is available 24×7 and knows the pulse of the villagers better than the banks. Online P2P money lending is similar to what the money lenders do but on a larger scale and in a structured manner.

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Why do people prefer money lenders to banks?

Banks have a set of administrative rules they cannot overlook. The money lender is an individual who frames his own rules. Generally, money lenders lend the money to borrowers on mutually acceptable terms and conditions.

  • There is not much documentation involved when money lenders lend money. But on the other hand, banks have stringent documentation requirements. 
  • Borrowers need a good or excellent credit score to get collateral-free loans from banks, whereas it is not so with money lenders.
  • Moneylenders are available 24 x 7 x 365, whereas banks are not.
  • Besides, the moneylender connects with you emotionally, whereas the banks have a professional outlook.

How does online money lending compare with moneylenders?

  • Online P2P lending platforms offer 24 x 7 x 365 services, similar to moneylenders.
  • Usually, online P2P lending is collateral-free. However, there can be collateral requirements if the amounts involved are high.
  • Online P2P lending does not require much documentation. The documentation process is generally online, where the borrower can upload copies of KYC and other documents online.

However, the moneylender charges unusually high-interest rates, whereas online P2P lending is comparatively cheaper.

How does online money lending work?

P2P lending in India is generally a crowd-funding model, with the online P2P lending platforms being NBFC fintech companies. For example, India’s top P2P lending platforms are Faircent, RupeeCircle, PaisaDukan, Finzy, etc.

The P2P business models work on the auction model, where the lenders bid for the borrower’s loan requirements. The borrower can accept or reject the bids accordingly. 

Besides, the P2P lending platforms offer services like credit assessments, loan recovery, etc. They coordinate with the borrower and the lender to facilitate the transactions.

Are the P2P lending platforms regulated?

The RBI has issued instructions for regulating P2P lending platforms by allowing NBFCs alone to register as P2P lenders. So, a P2P lender cannot lend money online without the registration certificate.

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Borrowing and Lending Limits

P2P lending is like lending friends money. The minimum loan should be Rs 500 to Rs 750, with the maximum cap fixed at Rs 50 lakhs across all P2P lending platforms. However, one-to-one lending by a single lender to a specific borrower should not exceed Rs 50,000. It implies that if a borrower needs Rs 2 lakhs as a P2P loan, there will be a minimum of four P2P lenders.

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Interest rates and other conditions

The interest rates depend on various factors. Usually, the P2P lending platforms have a unique algorithm that determines the borrower’s credit ratings based on multiple parameters. Accordingly, it classifies the borrowers into different interest rate slots. A better rating ensures that the borrower falls in a lower interest rate slot. So, this model encourages good repayment practices among borrowers. 

Usually, the borrowers and lenders mutually agree on the interest rate, repayment modes, tenure, and other conditions. So, the chances of defaults are less. However, the maximum term for any P2P loan cannot exceed three years. Besides, the rules stipulate that the P2P platform should disclose to the lender the details of the borrowers, credit scores, and loan conditions. Similarly, it has to share the details (except personal identity and contact number) of the lender with the borrower.

Advantages of P2P lending

  • It allows borrowers with low or even no credit ratings to borrow money. Generally, banks do not cater to such borrowers.
  • The borrowing process is entirely online, with the approval and disbursal being quick. 
  • The documentation process is simple.
  • The borrower gets timely financial assistance to cater to their financial emergencies.
  • The loans are usually collateral-free.

Demerits of P2P lending

  • There are several restrictions on the maximum amount you can borrow. So, if your requirements are high, the traditional banking channels are the better bet.
  • The interest rates charged by online P2P platforms are comparatively higher than banks.
  • The P2P lending platform can sometimes employ questionable recovery modes.

Final Thoughts

P2P money lending offers hassle-free avenues for borrowing money. Borrowers do not have to submit unnecessary documents or collateral to get financial assistance in an emergency. Though the interest rates in P2P lending are high, the convenience factor makes them popular. They could well redefine the way money lending happens in India today.

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