P2P lending

22nd August, 2021 Economy

Context:

In 2017, the Reserve Bank of India had brought this service under its regulatory purview.
Even at the time, there were more than 20 P2P lending players in the market but RBI’s regulations ensured only the serious ones with watertight business models remained in the sector.
In P2P lending, users sitting on idle money provide loans to potential borrowers identified by the service provider.
These lenders then receive payments from the borrowers on a set basis — either one time, or in equated monthly instalments.

Some of the major companies operating in this space include RupeeCircle, Finzy, IndiaMoneyMart, etc.
For its P2P lending feature, CRED has tied up with RBI-approved non-banking financial company Liquiloans.

One of the biggest risks associated with this kind of lending is the non-repayment of loans. Given that P2P lending is a form of unsecured loan, there is no guarantee put up by the borrower for the lender to redeem in case of a default.
While the lenders seek to reduce the dangers related to giving high-risk loans, the platforms are more attuned to attracting borrowers. As such, they do not consider the purpose of the loan, and often encourage expensive—even risky—loans.

P2P companies would be structured as NBFCs so that they can be regulated by the Reserve Bank of India.
P2P companies are to operate only as intermediaries i.e. they would not encroach on functions of traditional banks or NBFCs.
The fund transfer should be made directly into the borrower’s account from the lender’s.
Minimum capital requirement to set up a P2P platform would be fixed at Rs. 2 Crores and the companies cannot assure returns to the lenders
The P2P platform must adhere to existing customer data confidentiality, requirements and loan recovery procedures similar to those used by NBFCs and traditional banks.
A number of limitations regarding physical presence, board structure, leverage ratio, lender limits, have also been proposed by RBI with regard to the P2P business.