What is Peer-To-Peer (P2P) lending?
P2P platforms can be understood as extension of the e-commerce ecosystem where sellers and buyers meet with the aid of the internet and reap the benefits of low costs and trimmed trade barriers. Similarly, on peer-to-peer lending platforms, a borrower whose need may be as low as a few thousand rupees can fill a loan application form, which is then taken up by interested parties who aspire to make some good money from comparatively higher interest rates they can charge from the borrower as against what they can avail by parking their funds in traditional places like bank fixed deposits.
Reasons for a boom in P2P lending
That credit growth in the country has slowed and even hit a new-low is a much-debated topic. Then is the crisis gripping the non-banking financial institutions (NBFCs) after IL&FS defaulted on its corporate debt. Scheduled Commercial Banks (SCBs) have on the other hand turned more cautious towards appraising loan applications owing to increased RBI scrutiny and the fear of being caught in the fire of bad loans where borrowers fail to repay the debt they owe.
In the above scene and amidst the tech revolution that India is witnessing with more and more people accessing the internet, the revolutionary concept of peer-to-peer lending is capturing the imagination of all.In simple terms, peer-to-peer lending is nothing but democratization and decentralization of the hitherto money lending process where institutional credit from banks and non-banking companies was the only means available to a borrower. P2P platforms are now here to fully exploit the potential of internet services and help connect individual borrowers with individual lenders.
Mechanisms and restrictions to minimize the risk
P2P platforms usually have an in-built mechanism that evaluates the application posted by an interested borrower prior to that application being picked up by lenders. One also needs to upload documents that can establish the repaying capacity of the borrower in order to minimize the risk involved in the lending process. The application, once approved by the platform, is available to be picked up by lenders for a fixed duration after which the application lapses. Lending can also come from one creditor or a number of creditors jointly funding the project.
In addition to above, Reserve Bank of India (RBI) has put certain restrictions in place to ensure safety. RBI has capped the aggregate amount that can be lent or borrowed by a particular person at any point of time at INR 10 Lakhs. Also, the exposure of a lender to the same borrower shall not exceed INR 50,000. Restrictions are also placed on the maturity of loan which shall not exceed 36 months.
Challenges
While it can be said that P2P lending has opened up new avenues both for people looking for funds as well those looking to earn good interest on their holdings, it brings with it its own set of challenges. Internet is the most vulnerable place today where frauds can be perpetrated by forging data and luring users to earning quick money.How P2P platforms intend to overcome these barriers by being a secured place for those wanting to extend their money as credit is yet to be seen. It can be said that most of the loans through the P2P platforms will be collateral-free, thereby adding to the risk of creditors in case the borrowing party lacks will and/ or capacity to repay.
Still, P2P is an interesting watch, more at a time when traditional lending sourcesare struggling to deliver the results expected out of them. For economy to grow, money must exchange hands with idle money put to use by those who have a good business idea. P2P lending takes this vision forward.
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