Photo: iStock
Photo: iStock

Lending and borrowing limits on peer-to-peer lending platforms

RBI has imposed limits on how much can be lent and borrowed by individuals from these platformsto limit the risk exposure of individuals

Peer-to-peer (P2P) lending service providers have been around since early 2014 but for investors looking to put some money in this space there was a fear of the sector not being clearly regulated under standard guidelines. After making it clear that P2P lending companies will be registered as non-banking financial companies (NBFCs), the Reserve Bank of India (RBI) recently came out with guidelines for the P2P lending space, which you can read here.

Here, the regulator has clearly defined the limits for borrowers as well as lenders on these platforms. But before that, a bit about P2P lending. 

These companies provide a platform, or marketplace, for borrowers and lenders to interact. Lenders and borrowers have to register to use this platform. The P2Ps earn their revenue, from lenders and borrowers, based on how much money is lent. 

The P2P platform matches lenders and borrowers based on a lender’s risk-taking ability and a borrower’s creditworthiness. This results in varying interest rates for borrowers, i.e., return for the lenders. 

These platforms also use alternative credit scoring metrics, besides credit scores from credit bureaus.

Many lenders find P2P platforms attractive because of their potential for giving higher returns, compared to fixed and savings bank deposits. In fact, these platforms also market their services by comparing the returns from P2P lending with returns from mutual funds. It is important to note here that these platforms cannot guarantee any return. They are only a regulated intermediary between lenders and borrowers. And as the loans are unsecured, if a borrower defaults, the entire loss is borne by the lender.

Thus, the RBI imposed limits on how much can be lent and how much can be borrowed by individuals from these platforms—to limit the risk exposure of individuals. Limits have also been imposed on how much a person can lend to a borrower, as well as across all the P2P platforms combined. Before the RBI guidelines, there were no specific limits and the platforms were free to take their own decisions. Now, a person can lend a maximum of Rs50,000 to a single borrower. And an individual’s total exposure to P2P lending can not be more than Rs10 lakh, across all the platforms combined.

P2P platforms are useful for those who are unable to get loans from traditional sources like banks or other NBFCs—maybe because they don’t have a credit history—though at a higher interest rate.

These can be used by those with good credit scores too. If such a person was to take a personal loan from a bank, it would come at 16-17%. Through P2P lending they can get that loan at around 14%. Those with low credit scores typically go to other NBFCs, and get loans at 22-23%. With a P2P lender, they can loans at 4 percentage points less, say P2P executives. However, with interest rates in the banking system on a downward trajectory, check with all sources before taking a loan. Also, be careful to not compare the P2P lending rates with credit card interest rates.

No borrower can have loans of more than Rs10 lakh, from all the P2P platforms combined; and no more than Rs50,000 from one lender. All loans through P2P platforms come with a payback period that cannot be more than 36 months. The borrowing and lending limits will be imposed based on certificates obtained from the borrower or lender, which is a self-declaration. 

If you are a borrower, remember that P2P platforms will now send information to credit information bureaus. Therefore, defaulting on P2P loans would adversely impact your credit history and score, and impair your chances of getting loans from banks and any NBFC in the future.

If you are a lender, allocate only a small part of your investments to P2P platforms, as there can be loss of capital.

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