Peer to peer lending (or P2P lending) is one of the most innovative financial products of recent times. It enables creditworthy borrowers lower their cost of loans and individual lenders/investors to lend directly to their peers and community thereby earning higher returns. P2P lending is also known as social lending or crowd lending. With peer-to-peer lending, borrowers take loans from individual investors who are willing to lend their own money for an agreed interest rate. The profile of a borrower is usually displayed on a peer-to-peer platform where investors can assess these profiles to determine whether they would want to risk lending money to a borrower.A borrower might receive the full loan amount or only a portion of what he asked for from an investor.
P2P lending in India is fast gaining popularity among people in the era of cutting-edge technology. This type of lending is designed to benefit both lenders and borrowers. Basically, it allows individuals to transact with each other without any involvement of financial intermediaries like banks or other financial institutions. The functioning of Peer-to-Peer starkly varies in comparison with traditional banks. It can be considered as a platform for people to match their borrowings with lenders who are offering to lend using this platform.
Peer to Peer (P2P) lending offers assistance to borrowers, who are seeking for quick loans from lenders, at relatively lower interest rates than direct financial institutions. On a flip side, investors prefer Peer to Peer (P2P) lending because they get the access to higher rate of returns instead of parking their funds in a savings account. It provides a more receptive podium to borrowers who require rapid speed of funding, even when they are subjected to similar credit checks such as banks.
However, most borrower’s biggest advantage is that they receive lower Annual Percentage Rate (APR) than the ones which are usually available through credit cards or other traditional ways like cash loans and gold loans. Many lenders have begun to prefer P2Ponline money lending in India since their moneygets invested in real people, rather than mutual funds or banks. This type of lending also attaches diversification to an overall portfolio of lenders.
If you ever approached a bank for a personal loan, then you must also be aware of the challenges attached to it. Generally, loan applications get rejected by the bank due to many reasons, including no credit history, low income, the absence of savings account with the concerned bank and more. In addition, they do not consider extending loans of a smaller sum. Moreover, even if the bank agrees to give personal loans, it charges very aggressive interest rates from you, high processing fees as well as heavy penalties in case of a delay or default.P2P lending has been able to bring down the cost of investment by using technology like never before. Typically, borrowers who are funded,pay interest ratesranging between 12%-24%, based on their risk profiles minus any hassle with PaisaDukan as P2P platform in India and many others.
High overhead costs have been cut down that earlier went into running a bank by giving way to match borrowers with their suitable lenders in real time. It is a win-win for both where borrowers avail funds at the lower rates, which is a direct benefit as a result of increased efficiency and lenders receive higher interest rates than the ones available on the investment of any debt.
Let us take an example of PaisaDukan as P2P Lending Platform in India to ascertain the steps to be followed by both borrowers and lenders separately.
However, Reserve Bank of India (RBI) has set certain guidelines to regulate transactions on platforms of P2P lending in India. Firstly, the transactions carried out between borrowers and lenders across all platforms of P2P should not exceed Rs. 10,00,000. Secondly, an individual lender should not lend more than Rs. 50,000 to an individual borrower at a given point of time on all P2P platforms. Thirdly, the term of the loan onpeer-to-peer lending platforms should not go beyond 36 months. On a concluding note, the future of P2P lending in India looks bright.
Even though global P2P lending is around since 2005, according to some financial regulators, there still isn’t an exact legal definition for peer-to-peer lending, but the World Intellectual Property Organization (WIPO) terms P2P lending simply as a practice of lending or borrowing money from one private entityto another private entity, they might or might not be regulated by government oversight. It also goes by the names of ‘social lending’ or ‘crowd lending’.
In India, the market was earlier unregulated, but now the Reserve Bank of India has published guidelines on regulation of P2P lending. The good news being final guidelines are in place as there are about 30 peer-to-peer lending platforms in India awaiting license. RBI did issue a guideline classifying peer to peer lending platforms as NBFC-P2P.
BigWin Infotech’s PaisaDukan.com became the first in India to get the nod from RBI to set up their NBFC-P2P for peer-to-peer lending. Seeking inspiration from ‘Digital India’, The Company’s founder Mr. Rajiv M Ranjanwas involved in major path breaking banking projects like the Cheque Truncation System (CTS), Real Time Gross Settlement System (RTGS), National Electronic Fund Transfer (NEFT) and Negotiated Dealing System (NDS). He has been an active participant in initiatives of institute of Development and Research in Banking Technology (IDRBT). Rajiv’s expertise comes from his 18 year experience in technology as well as banking sector which started from a degree in Computer Science Engineering to Indian Institute of Management, Calcutta (IIMC).
With the flexibility in rate of interests, it is not only beneficial to the borrowers but with high returns and risk cutting helps the lenders too. The real reason peer-to-peer lending has caused majorly positive ripples in the finance world is because unlike traditional means of borrowing where the lender holds most of the authority and power of decision making regarding the distribution of their funds (often depending on risks and previous debts of the lender), P2P provides all-purpose funding for everyone with open doors. Although having a good credit score will help you get a better rate of interest on unsecured loans. P2P lending with itsinnovate approach has a huge potential in the Indian market, especially since India is self-assured to be a USD 4 billion economy by 2022. This is also one of the factors why NBFC sector has shot up drastically in recent financial years, contributing to almost 10% of total share in the entire financial sector. Bright things are ahead, where you won’t have to compromise on your passion and pursuits with silly reasons like lack of capital!
The NBFC wave is well received among lenders worldwide since one doesn’t have to be a high roller or an exuberantly rich person to be a lender. Freelancing individuals with no fixed monthly income or even small time business owners can participate in the large lenders community and feel right at home. The most attractive aspect of NBFC for the lenders is that they can simply invest once and reap benefits for months to come.
The fancy new financial jargon we hear nowadays is NBFC or Non-Financial Banking Companies orin case you really follow the market, it has been branched out to several new avenues catering some specific needs. One of the most trending as well as customer-facing avenue is P2P lending, which brings all such Peer to Peer Lending platforms under the umbrella of a term called NBFC-P2P. The full form of NBFC-P2Pis quite self-explanatory in itself, but what does it really mean?
The recent years, NBFC have enjoyed quite a spotlight but it wasn’t so when the story started. At one point in its history, it contributed to one-sixth of the global outstanding credit, and thus was potentially seen as a systematic risk to the financial sector as a whole. In India, starting its legislative journey under the tutelage of Reserve bank of India as early as 1964, the Chapter III-B which was first introduced with motive to regulate ‘deposit accepting’ NBFCs in 1963, under the Reserve Bank Amendment Act went through many innovations and committees appointed by Governors of RBI over the year. From the James S. Raj Committee of 1974 which successfully banned chit fund schemes to the Chakravarty Committee that assessed and recommended links between banks and NBFC in terms of their impact on the economy and the credit system in 1982, to the more recent Usha Thorat Committee of 2010.
Specifically, the Usha Thorat Committee was established in 2010 to regulate the risks involved with NBFC and ways to disentangle its participation the outstanding credit debt category. The committee was a type of a by-product after the uproar among NBFC over granting them banking license. They (and most of the finance sector) believed NBFC would never sustain in its current limitation, thus counter-arguing that the license would be the ticket to recovery. The decade long wait finally ended in April of 2014 when underwhelmingly RBI decided to grant license to 2 applicants out of the 27 who applied. The pool of the applicants went from conglomerates like Birlas and Ambanisto micro-lenders like Janalaxmi.
The tussle for a banking license by and for NBFC historically has always been an uphill battle, with the RBI’s issuance of the banking licence happening once-in-a-decade. But RBI promised to change that, change it did! Just as the NBFC obituaries were being rolled out by the market investors, a much needed reform was in the pipeline. What followed were a series of guidelines and amends to revive the NBFC market. Starting from November 2014, there were stricter norms put in place for non-performing loans and gave them a three year time frame to implement, furthermore, certain tier-1 requirements are lowered to 10% from the previous 12%. This saw the NBFC flourish to new horizons, definitely clearing the air of uncertainty surrounding it. To supplement the growth further, the rough proxy for wholesale borrowing was bought down 150 points by the government. This caused an almost 100% rating on NBFC valuations since 2014. The annual loan growth of 16% in the last two years alone which is twice as fast as default bank credit growth is the sign of stability and progressive way ahead.
NBFC have already proven to be strong performers in consumer credit lending sector and while private sector banks with their wide spread network of branches and ATMs might delude you into thinking that they lead the retail lending market, in reality, even they are feeling the pinch of NBFC close on their heels. Considering the targeted high-volume marketing by the private banks, there still happens to be an unmet void of demands between small enterprises and start-ups with no real collateral or flowing cash assessment and credit lending. Where on one side the private and corporate banking were focussing on project based finance and resolving non-performing loans, NBFC filled in the open need for peer to peer money lending.
Since Indians have an ingrained philosophy of borrowing money from informal sources like friends, family and money lenders, the offline crowd-sourced bazaar was just itching to sophisticatedly evolve into a consolidated and regulated online P2P marketplace. Micro-financing proved its worth during the aftermath of the Andhra Pradesh crisis in 2013, where the market leaders nearly tripled their loans books in just one year. For banks, the P2P lending poses a competitive conflict of interest, and they soon saw right through it. Now-a-days, corporate banks are funding NBFC, which can be seen in the exponential share of 50% (risen for ~6%-9%)in bank credit.
“The rise of NBFC and P2P lending from a minority to the mainstream proves its unprecedented progress and the potential to cause heavy disruptions to traditional, older direct financial models. It is difficult to pinpoint what shape and form it will finally settle at but we are certainly set to move this industry in a right direction”, says Rajiv Ranjan, Founder and CMD of PaisaDukan.com, which is among India’s first to receive the In-Principle NBFC-P2P approval from the RBI. He concluded by saying, “the future belongs to innovation, speed and change, and right now we are just scratching the surface”.