Personal Finance

Now, a safer marketplace for loans

Radhika Merwin | Updated on January 08, 2018 Published on October 21, 2017

RBI’s norms for P2P lending provide credibility to the online platform

If you want to raise money quickly for business or personal use, the peer-to-peer (P2P) lending platform has now become more transparent and safer. The RBI last week laid down directions that bring more credibility to the online platform.

What is it ?

A P2P lending platform brings lenders and borrowers together. Both have to register themselves on the platforms for a fee, which varies across platforms. For instance, a borrower under i2ifunding.com has to pay ₹100 for creating a borrower account while a lender/investor has to pay a one-time fee of ₹500. Lendbox charges a one-time registration fee of ₹500 for a borrower and a lender.

At the time of registration, the borrower has to submit documents for date of birth, identity, address proof, bank statements and proof of income. Based on these documents, the P2P company verifies the identity of the borrower and assesses his/her credit profile, which is disclosed to the lender.

While many players have already been following the KYC norms, the RBI’s guidelines have now made it binding on the P2P platform to do the necessary due diligence and undertake credit assessment and risk profiling of the borrowers and disclose it to prospective lenders.

Modus operandi

P2P platforms normally suggest an indicative interest rate for each borrower based on the loan and credit score on their websites. As a borrower, you can post the loan requirement on the platforms at the interest rate recommended by the P2P player. If your need is urgent, you can also quote a higher interest rate to draw investors. The RBI has specifically laid down the directives for disclosure requirements for P2P platforms.

To the lender, such online platforms will have to disclose details about the borrower, including personal identity, required amount, interest rate sought and credit score. To a borrower, though, while the proposed amount and interest rate offered are to be disclosed, the RBI has directed against disclosure of personal identity and contact details. Some players believe that this is to avoid negotiations outside the platform.

Once the loan is posted, investors can accept, reject, or re-negotiate. Once the deal is through, the borrower and the lender sign a formal contract and the disbursement of the loan begins. Most platforms set a cap for the maximum amount a single investor can lend to a particular borrower. Hence, a borrower’s loan is funded by multiple investors. The RBI’s guidelines now cap the maximum exposure of a single investor to the same borrower at ₹50,000. Also, as a borrower, the maximum you can borrow across all platforms is limited to ₹10 lakh.

The RBI has mandated that the fund transfer between the lender and borrower should be done through an escrow account operated by a trustee.

At least two escrow accounts — one for funds received from lenders and pending disbursal, and the other for collections from borrowers — has to be maintained. All fund transfers should be done through and from bank accounts; cash transaction is prohibited.

Rate and tenure

Interest rates charged vary across borrowers and platforms. Broadly they start from 14 per cent and can go up to 30 per cent. These rates are slightly higher than that charged by banks on personal loans, usually in the 12-20 per cent range.

P2P platforms, just like banks, also charge processing fees which vary across players. For instance, Faircent levies fees in the 3-5.5 per cent range depending on the interest charged on the loan (rates vary between 10-14 per cent and 30 per cent). Lendbox charges 2-6 per cent (interest rates range from around 16 per cent to 28 per cent and above).

While P2P lending has generally meant unsecured lending, the RBI’s guidelines have categorically stated that secured lending (against a collateral of any sort) is not permitted under P2P. Also, the tenure of the loan cannot exceed three years.

Many gains

P2P platforms falling under the purview of the RBI lend comfort to both the borrowers and the investors, by bringing in greater transparency and mitigating the risk of unhealthy practices.

As the pace of lending activity and competition increases, borrowers can benefit from softer interest rates over the long run.

The guidelines require P2Ps to become members of the Credit Information Companies (CICs) and maintain and update credit information of the borrower.

For a lender, this lowers the risk of defaults.

For borrowers, it will help them build their credit history.

Most borrowers drawn to online platforms may lack or carry a poor credit history.

Many online platforms have been employing agents to undertake recovery services.

The central bank has cautioned P2P platforms against the use of coercion during the recovery process; this would offer respite to borrowers.

Published on October 21, 2017
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