Peer to Peer Lending:
Credit financing is an integral component of any economy and has been there since ages. The significance of various credit options became popular with technological advancements over the past two decades, especially in India. Moreover, with digitisation on the fore, practices like peer to peer finance have gained notable popularity in the current financial landscape.
What is Peer To Peer Lending?
Peer to peer financing involves only two parties, the lender or investor and the borrower. This external funding facility is based on the concept of crowd-sourcing. Thus, it does not include any institutionalised intermediary, like a bank or NBFC.
Individuals who find it challenging to avail loans from financial institutions often opt for peer to peer lending. Over the years, this financing option has become tremendously popular among business owners in India to finance their short-term requirements, owing to its simplicity and high approval rate compared to other sources.
According to a publication in the Economic Times, the Indian peer-to-peer lending industry is expected to reach a market size of $4 – 5 billion by the end of 2023.
Peer to peer finance is carried out on dedicated platforms. Individuals sign up on these platforms as investors/lenders and borrowers.
Businesses can alternatively opt for invoice discounting services to meet their operational expenses. With KredX, India’s leading integrated cash flow solutions provider, you can avail cash advance against your business’s unpaid bills within 24 – 72 hours*. You can thus address the financing needs of your organisation efficiently with our invoice discounting service.
How Does Peer To Peer Lending Work?
P2P portals provide a forum for prospective investors and borrowers to connect directly without the intervention of a third-party. These platforms set the terms and conditions under which participants operate. Factors like the loan amount, rates of interest and repayment tenure vary across different portals though.
- Here’s how peer to peer finance works for an investor:
- A business creates an account on the P2P platform.
- Aspiring investors can view the different loan projects on the portal, based on requests posted by borrowers.
- The portal assesses and verifies these credit demands, and assigns a rate of interest and labels it with a risk category.
- Lenders or investors can base their decision to fund one or more of these projects on these factors.
- Once the borrower accepts the loan offer, the investor transfers the sum to an escrow account for disbursal.
- P2P platforms conduct verification of the borrower to ensure repayment security.
- The EMI receipts begin from the following months.
- Several individuals choose to invest their disposable income on P2P portals instead of going for options like stocks and mutual funds in the hope of higher returns.
- The following points illustrate how peer to peer financing platforms in India works for borrowers:
- Businesses need to sign up as borrowers and provide all the essential documents necessary to avail a loan.
- Each individual is assessed based on various parameters, including credit score, income status, debt-to-income ratio, and the likes. Accordingly, a credit profile is assigned.
- Borrowers then post their financial requirements live on the portal and set interest rates and tenure accordingly.
- Once live, borrowers can track investor commitment via their accounts.
- Upon completion, the portal runs a physical verification of the borrower followed by other necessary formalities.
- Following that, borrowers receive the loan amount in their bank account.
Note that, the details of how borrowing and lending work explicitly may differ from one peer to peer finance platform to another.
What Are The Pros Of Peer To Peer (P2P) Lending?
Lenders enjoy the following advantages via P2P platforms:
- They can earn high returns via their investment or lending.
- Risk is moderate due to the extensive credit checks on borrowers.
- Investors may find it more lucrative compared to other investment or depository options, such as a savings account.
P2P lending provides the following benefits to borrowers:
- Access to funds for a variety of financial requirements, like home renovation, business expansion, etc.
- Individuals who do not qualify for a bank loan can avail funds from these platforms.
What Are The Cons Of Peer To Peer Finance?
Borrowers can find P2P financing disadvantageous for the following reasons:
- The rates of interest can be considerably higher than bank loans and other credit options like invoice discounting. Posting lower interest rates for projects may not attract investors.
- It can be some time before the entire loan amount is raised.
- Peer to peer financing may not be suitable if in need of instant funding since it involves extensive formalities.
If you are looking to raise quick working capital for your business operations, you can opt for invoice discounting service by KredX. It provides quick onboarding and charges a nominal service fee to access instant funds by leveraging the unpaid invoice.
The demerit of P2P financing for investors is:
- Although the risk is regulated, it’s still more considerable than banking instruments, like a fixed deposit or a savings account.
Businesses should thoroughly familiarise themselves with peer to peer finance intricacies before opting to invest or borrow. They should also explore other options to ensure sound decisions on their part.
FAQs on Peer to Peer Lending:
A. Individuals aged 18 years or above with legitimate PAN and a bank account can invest in P2P platforms. RBI certified NBFCs can also lend on these portals.
A. Yes, the Reserve Bank of India regulates all valid P2P platforms in India. RBI made it mandatory since October 2017 for all such portals to obtain an NBFC-P2P license.
A. Investors can expect returns within 12–28%, depending on how they spread their investments.
Borrowers will need to provide the following documents –
- Salary slips
- Bank statements
Apart from these, borrowers may need to produce other documents as well.