Things to check before opting for P2P lending

Peer-to-peer lending, or more popularly known as P2P lending, is the online financial framework that connects lenders and borrowers on an online platform without a bank acting as the third party. This lack of intermediaries, and subsequently the lower costs involved, make P2P lending an attractive investment opportunity.

In P2P lending, some structure is being brought by the Reserve Bank of India (RBI). The P2P entity, which brings the lender and borrower together, cannot offer any guarantee on the loan. RBI regulation states that the P2P “shall not provide or arrange any credit enhancement or credit guarantee”, so the lender has to go for unsecured lending.

What then are the security features in this form of lending?

The service provider or the P2P entity, provided it is a serious market participant, would list on the website its role, how it can help you and how they cannot help you. The guidance mentioned on their website will give you a perspective on where you stand.

Their services or requirements include:

• Segmentation of borrowers based on credit score and income bracket, among other things. The loan rate bracket for that profile of borrowers (higher rate, higher risk) gives an indication;

• Moderate the discussion between the borrower and lender;

• The borrower may be required to obtain insurance (including personal life, permanent disability, loss of livelihood or employment) for the loan;

• Have a panel of lawyers to initiate legal action in case of non-payment of EMIs, under Section 138 of the Negotiable Instruments Act for dishonour, action under the Insolvency and Bankruptcy Code for non-payment of creditors, enforcing payment assurance, if any, among others.

RBI guidelines require P2P players to execute the following:

• Undertake due diligence on the participants;

• Undertake credit assessment and risk profiling of the borrowers and disclose to lenders;

• Undertake documentation of loan agreements;

• Render services for recovery of loans.

RBI guidelines limit exposure as follows:

• Aggregate exposure of one lender to all borrowers, across P2P platforms, to ₹50 lakh;

• Lender investing more than ₹10 lakh across P2P platforms shall produce a certificate from a practising chartered accountant certifying a minimum net worth of ₹50 lakh;

• Aggregate loans taken by a borrower across all P2P platforms subject to ₹10 lakh;

• Exposure of a single lender to one borrower, across P2P platforms, capped at ₹50,000;

• Maturity of the loans is a maximum of three years.

The gist of the RBI risk exposure guidelines is that between one lender and one borrower, the cap is ₹50,000, exposure of one lender across the P2P mechanism is ₹50 lakh and one borrower can avail of a maximum of ₹10 lakh across all P2P platforms. RBI also requires P2Ps to become members of all credit information companies and submit data.

Banking sector NPA data shows that the segment with the highest level of NPAs is large corporate borrowers (approximately 70% of total bank NPAs) and the lowest level of NPAs are from retail (approximately 5% of the total).

Which P2P platform(s) should you go with?

The RBI website lists the approved P2P platforms; you can cross-check the service providers thrown up by Google with the RBI list, and compare their service and NPA levels.

FundsTiger.com is an Online Lending Marketplace.