India is a country with a young population and middle class that aspires to become successful by starting their own business. However, this aspiration to become big needs fuel in the form of funds. Many business owners are turning towards business loans to invest in their business. The requirement of business loans by business owners in India has caught the eye of many lenders, and almost all banks and NBFCs are catering to the business loan requirements.
Unfortunately, not every business owner qualifies for a business loan. This happens especially among self-employed individuals whose income is seasonal or is affected by various market factors. Additionally, most loan lenders consider a high credit score as an essential eligibility criterion to grant a loan. Therefore, business owners with low score find it difficult to avail a loan for business.
In all, most business owners turn towards peer to peer lending.
What is Peer to Peer Lending?
Peer to peer lending is referred to as P2P lending a well. It enables an individual to borrow money from other individuals without depending on the standard banking process and channels. It is a type of crowdfunding that matches the requirements of borrowers and lenders.
The best way to borrow money under this method is by enrolling into a P2P lending platform. The popularity of the method has gained immense popularity in the last a couple of years.
How does P2P Lending Work?
Both the borrowers looking to borrower funds and the lenders looking to lend money need to sign up on the P2P lending platform and become a member to be able to participate in the process. Before lending money, the lender would perform a range of checks, which include credit history, employment, the purpose of the loan, etc. The criteria undoubtedly seem similar to that of the banks and other lenders. However, it is quite a bit flexible.
Depending on the results of the criteria checks, the borrowers are assigned different categories. These categories are assigned according to the percentage of risk a borrower carries. The borrowers with higher risk get loans at higher interest rates. Similarly, borrowers with low risk can avail the service at low-interest rates as they have the least risk of default.
The borrower has two options. He can either avail the service from the assigned risk category and pay the pre-determined interest cost or have the lenders bid on the right interest rate.
On the other hand, lenders who want to sign up for the service too have to undergo a check to ascertain that the money they are lending is not obtained from illegal activities. After a borrower signs up at a P2P lending service, he has some simple choices – bid on available loans or distribute the funds among different borrowers with different risk categories to balance the risk. Notably, it also increases the potential returns.
Benefits of Peer to Peer Lending
- The main advantage of P2P lending is that the borrowers who are not able to avail business loans through the traditional lending institutes can avail the facilities easily here. Notably, women entrepreneur who is not able to avail a business loan for women can also avail the service.
- Lenders are benefitted from the high-interest rates offered on the money they lend through P2P lending services.
- It is an ideal platform for the borrowers and lenders who are willing to negotiate the rates of interest other than a middleman negotiating on their behalf.
- P2P lending is a straightforward and fast process.
- There are generally no prepayment charges/penalty in case of P2P lending, which offers flexibility in the repayment of the loans.
Future of P2P lending in India
In the recent paper published by the Reserve Bank of India, P2P lenders can be regulated and classified as a new class of NBFCs (Non-Banking Financial Companies). If this comes to fruition, the P2P lending segment would certainly get the much-required legitimacy.
Furthermore, the growing popularity of this type of financing also led many NBFCs to initiate the process by tying up with P2P lenders to acquire new customers/borrowers. As a result, the main benefit that the NBFCs get is the decreased cost of credit verification. This, in return, increases the profits of these companies in addition to expanding the business by lending to a different market segment.
From the borrower’s point of view, the options of the probable lenders increase, which eventually can bring down the cost of borrowing in terms of rate of interest for them.
RBI has proposed regulation on P2P lending segments which shows that the banks see P2P lending as an emerging sector for the time to come. It can be a threat to traditional banking channels as well. In a nutshell, P2P lending can be expected to go big in the time to come.