Peer to Peer Lending
January 1, 2022Since humans started building civilizations, there has been lending and borrowing. From the times of barter system to the evolution of currency, there has always been a necessity to borrow. As the economy grows, the demand for money goes up. There are many means to borrow – lending from people, financial institutions like banks etc. One of the lesser discussed means, at least in India, is Peer to Peer lending.
Peer to Peer Lending also known as P2P Lending enables individuals to get loans directly from other individuals without any financial institutions in the middle. Online P2P lending began in 2005 with the launch of Zopa in United Kingdom with a vision to simplify the lending process which seem to be made complicated by the existing bank systems. But underneath the complex system lies the very simple principles of lending which pitched up this new idea. People were initially wary; but during the financial crisis situation of 2008-09, this gained prominence when the financial institutions were crumbling and struggling for survival. This concept came into thought when individuals with lower credit scores were spurned by the conventional financial institutions. When the credit score is less, the financial institutions do not encourage lending out to such people. There are many online P2P platforms in place that connects borrowers with potential individual lenders. Many people pool in an amount of money and the same is available for lending to the needy. The interest rates are lower than the usual rates charged by financial institutions. As a result, this can be boon for borrowers who are looking for a lesser rate of interest. Even if they have a lower credit score, they can avail loan amount through the platform. The process might be quick and convenient since it is an online process. As for an individual lender, this can be a platform where they can earn an interest which may be slightly higher than what they could earn on a regular bank fixed deposit. The money transfer and payment are entirely taken care through the online P2P platforms. There may be contingency funds that might be in place in some sites if the borrowers default the loan. In India, the P2P lending is regulated by the “Master Directions – Non-Banking Finance Company – Peer to Peer Lending Platform (Reserve Bank) Directions,2017” issued by the RBI on August 2017.Only an NBFC (Non-Banking Financial Company) can register as P2P lender with the permission of RBI.
The P2P platform does have its own share of disadvantages. There might be an additional fee that the comes with the interest rate that is being charged for the loan. If the credit score is less, there might be a higher rate of interest. Also; it might not cover the full investment risk of the lender. Like any other investment there is a certain amount of risk attached to this instrument also. There is always a sense of credit risk while lending to borrowers with low credit ratings. Also, the income earned by lenders investing via P2P lending platforms are subjected to Income Tax.
P2P is yet to find prominence in India due to various reasons like the conservative nature of the people, the lack of awareness, unavailability of data on the credit worthiness of the borrowers etc. There are various sites like Lendbox, Faircent, LenDen Club, i-lend etc. in India*. This can be a new way for investment as well as borrowing with its own share of pros and cons that needs to be tread carefully.
* Disclaimer: Echo Wealth does not endorse any of the P2P lending sites. This is purely for information purpose and not an invitation to the platform. Investor/borrower must maintain due diligence before entering into contracts with these sites.
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