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Are the P2P lending platforms for you?

Peer-to-peer format is not regulated in India. This is its biggest drawback, and the biggest risk

Are you facing trouble in getting loans from formal financial institutions, be it from banks or non-banking financial companies (NBFCs)? The reasons could vary from lack of credit information to delay in the process of getting a loan. According to a report by international philanthropic investment firm Omidyar Network, Big Data, Small Credit—The Digital Revolution and Its Impact on Emerging Market Consumers, in India, more than 400 million people borrowed money in 2014, but fewer than one in seven were approved for a formal loan.

To bridge the gap of unavailability of proper formal credit, an aggressive breed of loan providers has emerged in India, called peer-to-peer (P2P) lending. The concept is not new—it is basically an individual, who is not a financial institution, lending money to another individual. P2P lending is similar to a friend lending to you, but in this case, you have to pay an interest on the loan and the lender is a stranger.

The number of P2P lending companies in the online space has been increasing significantly. For instance, so far this year, close to 20 new online P2P lending companies have been launched, according to data compiled by Tracxn, a data analytics company. As of now, there are over 30 online P2P lending start-ups in India. This is much lower than the numbers in China, where the number of registered P2P companies is reported to have crossed 2,000.

Mint Money takes a look at the online P2P lending landscape, and whether it makes for a useful avenue.

What’s on offer?

Currently, in India the online P2P lending can be broadly divided into three categories—micro finance, consumer loans and commercial loans. The consumer loans category can be further divided into personal and education loans. Some of the companies in this category are Faircent.com, Loanmeet.com and i-lend.in

Generally, online P2P lending companies work as marketplaces that bring individual borrowers and lenders on to one platform for loan transactions without the intervention of traditional financial institutions such as banks and NBFCs. You can get loans for amounts between 25,000 and 30 lakh. For a personal loan, the maximum amount is usually 5 lakh, while a business loan can be up to 30 lakh. The tenors range from 6 months to 5 years and the interest rates can vary between 12% and 36% per annum depending on your credit profile.

“P2P lending is quick and cost effective. Also, we don’t have cost of capital the way banks and NBFCs have," said Vinay Mathew, founder and chief operating officer, Faircent.com.

To understand your creditworthiness, most online P2P lending companies look at various documents such as credit report from a credit bureau, bank statements and salary slip. “We have tied up with TransUnion for credit check and KYC (know-your-customer) formalities. Our borrowers and lenders are individuals," said Mathew.

The loan comes with a one-time fee similar to the processing charge levied by commercial banks, and can be 500-2,000 depending on the portal you apply to. Some may charge 0.5-1.5% of the loan amount as a one-time fee. Usually, there is no prepayment penalty if you want to prepay your loan. In case of delayed or non-repayment of equated monthly instalment, additional penal charges can be as high as 20%-24% per annum.

How does it work?

If you want to take a loan from a P2P lending portal, you have to first register yourself as a borrower. You can then put in your loan requirement on the website. Each borrower will have a page to provide information such as purpose of loan, why lenders should lend to them, financial status, educational qualification and employers’ details. This helps lenders know more about borrowers, and this is followed by a verification process of their details. Once you post your requirements, if a lender is interested to lend, she will approach you. Your loan requirement may be fulfilled by multiple lenders.

A lender will know the creditworthiness of a borrower. Usually, the platform allows a lender to diversify risk by lending to multiple borrowers. Some portals, in fact, allow lenders to give only up to 20% of the loan amount. The interest rates may also vary depending on the lenders’ demands. So, lender A may give the loan at 12% per annum, while lender B offers at 15% per annum. You have to repay the lenders directly at a fixed date every month.

Regulatory concerns

As of today, the P2P lending space in India is not regulated. Though Reserve Bank of India is aware about the aggressive growth of this space, on ground there has not been any progress in terms of regulations. Meanwhile, market regulator Securities and Exchange Board of India (Sebi) has proposed a framework for crowd funding. According to PwC India, like with many other financial technology stories, the India story will be different for online P2P lending as well from what happens in other countries. “It looks like the India story will pan out differently, primarily due to regulatory reasons. The online P2P lending space may remain more of a loan marketplace in India since recognised and registered lenders may also use this platform to distribute non-collateralised, small loans affordably. The regulatory framework has potential challenges including applicability of states’ money lenders’ provisions and their divergent interpretations of what would, or would not, require registration," said Shinjini Kumar, leader, banking and capital markets at PwC. “Also, applicability of credit information regulations for collecting and disseminating data relating to consumers is unclear. Sebi has floated a white paper, but subsequently (there has been) no movement. With 23 new banks targeting data and credit distribution in one form or another, I am not sure about the incentives for regulators to take up these issues with any sense of urgency," he added.

What you should do

As a borrower as well as a lender, remember that currently there is no regulatory framework put in place to protect you interests. “Online P2P lending is a good concept but the problem is that no one is accountable. Hence, it comes with higher risk attached. Also, the amount you borrow from online P2P companies is not recorded since it is not informed to a formal credit information bureau. The bigger danger, however, will be of over-leverage because at this point, person X can go to 10 different portals and take small, multiple loans even though her creditworthiness is low," said Rajiv Raj, co-founder and director, CreditVidya, a Mumbai-based credit advice and planning company.

If you plan to borrow from any of these portals, read the clauses properly. “If you know you can repay on time, after considering the interest rate, other charges and the turnaround time, you may consider a P2P portal if it gives you a good deal in a situation where you can’t get loans from anywhere else. But read all the conditions carefully," said Suresh Sadagopan, a Mumbai- based financial planner.. Be extremely cautions if you are approaching an online P2P portal. In case of fraud or credit risk, there is no safety net in place for you, as of now.

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