P2P Lending Scenario in India

by Shruthi K. Finance Advisor

Loans are one of the easiest credit facilities that can be availed by an individual or a non-individual. The processes are quicker with more streamlined operations at banking and non-banking financial institutions and many personal loan is even unsecured, requiring even lesser documentation and featuring quicker approvals. Despite the varied options enabled for availing formal loans quickly, many a time, formal loan approvals (personal and business loan) are rejected, based on the discretion of the concerned financial institution.

Less than one out of seven had their formal loan applications approved in 2014, while the total number of people who had applied for formal loans ranged to over 400 million in India. Credit scores, security reasons, personal accountability and various other factors are taken into consideration when formal loan applications are reviewed by banking and non-banking financial organizations. Stricter regulatory norms more often than not reduce the chances of approval with such institutions.

This scenario has led to the growth of peer-to-peer lending sites and facilities in India. Though not a new concept, the start and subsequent promotion of such facilities has been slower in India when compared with the global scenario.

What is Peer-to-Peer Lending?

Peer-to-peer lending, or P2P lending is a form of availing and offering loans that can be conducted among individuals, without going through the official channels of banks and NBFCs. It is similar to the situation wherein a person borrows money from a friend, except in this case, it might be a complete stranger who’s acting as the lender and an interest rate will be charged.

Normally, a third party website acts as a community wherein borrowers can find lenders and vice versa, based upon the financial requirements or capacities of either. Loans through a P2P lending system can be of a business or personal nature and the borrower would have to concede to the rules and regulations set by the borrower and the third party site that allows the initial conversation between the two.

P2P Lending and the Indian shade

While the rates of loans approvals in India is nothing close to a stellar figure, only a handful of P2P facilities actually operate in India. In 2015 itself, about 20 new online P2P companies have started operating, bringing the total number of registered P2P lending companies to 30. While for a year the growth seems substantially significant, it is still a pretty low figure when compared to the 2000 P2P lending facilities registered in China.

P2P loans can be broadly divided into micro finance, consumer loans and commercial loans. Consumer loans comprise educational and personal loans, while commercial loans help out in the purpose of business. Loans can be as low as INR 20000 to as high as INR 3000000. Personal loans are mostly provided to a limit of INR 5 lakhs to INR 6 lakhs and a business loan can go all the way to INR 30 lakhs or even more, depending on the terms and conditions of the lender and the site.

Lending happens more or less akin to the modus operandi of banks and NBFCs. One has to register on one of the P2P lending community portal and provide a few crucial details about himself, going in as a borrower or as a lender. The details and credit ratings of a borrower or lender are then verified by the site through a valid credit rating agency, such as CIBIL, TransUnion, etc. Post the verification, the site advises lenders what would be the appropriate percentage of the loan amount that they could sanction for a particular lender. This is done mostly to safeguard a lender too, as a pre-emptive measure against bad debts. A borrower is encouraged to avail the total amount of loan though different lenders, in hopes of securing better interest rates. Processing fees could range from INR 500 to INR 2500 depending upon the loan amount and the credit rating for a borrower.

P2P lending in India is not illegal, but is not regulated either. While Reserve Bank of India (RBI) has known about the growth of P2P lending in the nation and Securities and Exchange Board of India (SEBI) has proposed a framework for crowd funding, norms and regulations pertaining to P2P lending are more or less non-existent.

When it comes to achieving the wherewithal for higher studies, a new vehicle or starting a business, the safer, conventional way would obviously lead to a bank or a reputed NBFC. But the speed of loan approval and the various options available under P2P lending make it quite appealing for anyone. One should be careful though, because there’s no safety net for loans and no guarantee for the borrowers. Keeping the same in mind, one should proceed, if required, to avail a loan online through the P2P lending facilities available in India.