What is Peer to Peer (P2P) Lending in India and How It Works
Up to certain extent, the economy of a country is determined by the way its citizens borrow and lend money. Before banks came into existence, people borrowed money amongst themselves, such as landlords, relatives, etc., - whoever had extra cash. Especially in a nation like India, where unbanked population have spent the longest time without any banking system in place. Therefore, the concept of Peer-to-Peer (P2P) lending in India has existed longer in the country than any lending and borrowing system, although, offline.
Scenario in India
P2P lending in India is fast gaining popularity among people in the era of cutting-edge technology. This type of lending is designed to benefit both lenders and borrowers. Basically, it allows individuals to transact with each other without any involvement of financial intermediaries like banks or other financial institutions. The functioning of Peer-to-Peer starkly varies in comparison with traditional banks. It can be considered as a platform for people to match their borrowings with lenders who are offering to lend using this platform.
Why Choose Peer-to-Peer Lending?
Peer to Peer (P2P) lending offers assistance to borrowers, who are seeking for quick loans from lenders, at relatively lower interest rates than direct financial institutions. On a flip side, investors prefer Peer to Peer (P2P) lending because they get the access to higher rate of returns instead of parking their funds in a savings account. It provides a more receptive podium to borrowers who require rapid speed of funding, even when they are subjected to similar credit checks such as banks.
However, most borrower’s biggest advantage is that they receive lower Annual Percentage Rate (APR) than the ones which are usually available through credit cards or other traditional ways like cash loans and gold loans.
Many lenders have begun to prefer P2P online money lending in India since their money gets invested in real people, rather than mutual funds or banks. This type of lending also attaches diversification to an overall portfolio of lenders.
Banks Vs P2P
If you ever approached a bank for a personal loan, then you must also be aware of the challenges attached to it. Generally, loan applications get rejected by the bank due to many reasons, including no credit history, low income, the absence of savings account with the concerned bank and more. In addition, they do not consider extending loans of a smaller sum. Moreover, even if the bank agrees to give personal loans, it charges very aggressive interest rates from you, high processing fees as well as heavy penalties in case of a delay or default. P2P lending has been able to bring down the cost of investment by using technology like never before. Typically, borrowers who are funded, pay interest rates ranging between 12%-24%, based on their risk profiles minus any hassle with PaisaDukan as P2P platform in India and many others.
High overhead costs have been cut down that earlier went into running a bank by giving way to match borrowers with their suitable lenders in real time. It is a win-win for both where borrowers avail funds at the lower rates, which is a direct benefit as a result of increased efficiency and lenders receive higher interest rates than the ones available on the investment of any debt.
How Does Peer to Peer(P2P) Lending in India Work?
Let us take an example of PaisaDukan as P2P Lending Platform in India to ascertain the steps to be followed by both borrowers and lenders separately.
1. One needs to provide their basic information and submit their KYC (Know Your Customer) documents online.
2. Next step is to submit income documents and bank account statement.
3. One must thoroughly read through the loan terms and accept it.
4. Once the loan terms are accepted, it must be put to execution.
5. A borrower can then pay EMIs through auto debit(E-NACH).
1. Lenders must get themselves registered online through the website.
2. Secondly, submission of KYC documents is required.
3. Once the KYC documents are submitted, they can invest their funds.
5. Lenders will then start receiving EMIs through auto credit.
However, Reserve Bank of India (RBI) has set certain guidelines to regulate transactions on platforms of P2P lending in India. Firstly, the transactions carried out between borrowers and lenders across all platforms of P2P should not exceed Rs. 10,00,000. Secondly, an individual lender should not lend more than Rs. 50,000 to an individual borrower at a given point of time on all P2P platforms. Thirdly, the term of the loan on peer-to-peer lending platforms should not go beyond 36 months. On a concluding note, the future of P2P lending in India looks bright.