1. How do P2P platforms work and what do they offer?
Peer-to-peer lending is a mechanism which connects individuals in need of credit with others willing to lend. The platforms purely acts as an intermediary or marketplace that connects borrowers and lenders. You can register as a borrower or lender on any platform after undergoing a verification process by furnishing relevant details. As part of the process, borrowers will have to undergo a risk evaluation and pay a flat registration fee. Once registered, investors can reach out to listed borrowers and vice versa. Some P2P platforms will automatically make lending offers to borrowers that match your loan criteria on your behalf, while others will require you to do it manually.
All proposals are accepted on first come, first serve basis. The rate of interest typically ranges from 10% to 28% and the loan tenure may range from 3 months to 36 months. Once an agreement is reached between the borrower and the lender, a legally-binding contract is signed by them digitally. The loan amount is then transferred to the borrower’s account and the borrower makes periodic repayments via EMI over the stipulated time period. If a borrower fails to pay an EMI within a stipulated time, a penalty is levied on the borrower and is payable to the lender directly.
2. How are borrowers evaluated?
P2P platforms do not evaluate borrowers on the basis of a credit score. These perform their own set of checks to assess creditworthiness. Apart from usual checks around employment, income, credit history, etc, these rely extensively on tech to capture borrowers’ personal habits by tracking social media activity, app usage, among others. On the basis of details captured, borrowers are typically assigned to different risk buckets according to their credit worthiness. This serves as the basis for determining amount and tenure of loan eligibility, interest rate chargeable etc. Some platforms give borrowers the option of either selecting a loan as per assigned risk category and pay the pre-determined rate of interest or have prospective lenders bid on suitable rate of interest.
3. Are these platforms regulated?
All P2P platforms come under the purview of RBI regulations. All players are required to register for a NBFC-P2P license to provide P2P lending services. The regulations cover the scope of the P2P platforms’ activities and prescribe certain prudential norms to be followed by them. Under the rules, no borrower is allowed to borrow more than `10 lakh at any point of time, across all P2P platforms. Likewise, a lender cannot put up more than Rs 50 lakh across these platforms at any point. Further, a lender’s exposure to the same borrower, across all P2Ps, cannot exceed Rs 50,000. No loan can be sanctioned for a tenure beyond 36 months. No loan can be disbursed unless the individual lender has approved the recipients of the loan and all concerned participants have signed the loan contract.
4. How risky is it for lenders?
These platforms are primarily used by individuals who do not meet the lending criteria prescribed by traditional lenders. The safety of your principal depends partly on the risk assessment capabilities of the P2P platform. Besides, the loans are unsecured in nature. Given the nature of loans and profile of borrowers, a big risk is the non-repayment of loan by the borrower. The platforms do not assure full repayment of principal or interest thereon. In case of default, the platforms assist in recovery and fi ling legal notice, but cannot assure a positive outcome.
To be sure, the P2P platform is required to disclose all details about the borrower including personal identity, required amount, interest rate sought and credit score assessed by it. At the same time, the lender’s personal identity and contact details are kept confidential. Under the rules, the P2P platform is not allowed to hold the funds invested by the lender or paid back by the borrower. Such funds are to be held in an escrow account, so the platform itself does not have any access to the money.
5. What can lenders do to mitigate risk?
Do not blindly go by the interest rate on offer. Go through the borrower profiles carefully before approving any loan. At the same time, do not completely rely on the P2P platform’s risk assessment. For that reason, do not limit your exposure to a single borrower. Spread your outlay across multiple borrowers to reduce the impact of default by a few. Monitor the borrower risk profile on an ongoing basis.
