All you need to know about peer-to-peer lending

The Reserve Bank of India (RBI) has come out with a discussion paper to regulate the fast-growing crowd-funding and peer-to-peer (P2P) lending space. This space has been gaining momentum with about 30 players in this space and, therefore, the central bank believes it is important to regulate the space. Here’s all you need to know about these platforms:

What is peer-to-peer lending?

P2P lending allows an individual to lend/borrow money to/from other unrelated individuals without assistance from any financial intermediary. This is mainly done via the online platform that connects lenders with borrowers

What are the advantages?

People who may not be eligible to get loans from banks/non-banking financial companies (NBFCs) can take loans. It can also allow customers to become lenders and earn interest. However, it comes with risks.

What are the disadvantages?

Interest rates are higher than what a bank/NBFC may charge. Currently, it is not regulated so consumers can not approach any ombudsman in case of distress. Also, beyond the companies there are no grievance redressal systems in place.

How can individuals make use of such P2P lending options?

Borrowers who may not be able to access loans form banks/NBFCs can log on to these platform to get loans. So, people can tap into these avenues if you don’t have a good credit history or are a first-time borrower. Also, for loans of small ticket sizes, consumers end up tapping this medium as banks might not be very forthcoming in sanctioning small amount loans because of the cost incurred. The rates can vary between zero per cent and 36 per cent and the tenure can be between three months and three years. The maximum loan that one can avail via this channel is Rs 5 lakh.

How does RBI plan to regulate it?

RBI’s discussion paper has said that the platforms should adopt a company structure that can then be regulated by the central bank and it can be treated as an intermediary NBFC. Currently, P2P platforms are run by individuals, proprietorship, partnership or limited liability partnerships — areas outside RBI’s jurisdiction. The discussion paper also suggested that there should be a minimum capital of Rs 2 crore. The discussion paper also sought to curtail the freedom of these companies significantly and said funds raised through the platforms should go directly from the lender’s bank account to the borrower’s.