Before the origin of the banking system in India, people borrowed money from friends, relatives or those who had extra cash to spare. After the inception of banks and financial institutions, one can avail a variety of loans from these organisations.
But many times, financing a loan from a bank becomes a tedious and time taking process. These financial institutions not only follow strict RBI rules but also a long procedure before approving an individual’s loan. The situation worsens when a loan borrower fails to present required credit score that meets the demands of the banks, and hence end up helpless.
However, with the advent of digital media and global financial landscape, many portals have started online lending and borrowing which is gaining a lot of popularity among loan borrowers in India. This procedure is known as Peer- to- Peer lending.
Now let’s understand the whole procedure of P2P lending in detail:
What is Peer- to- Peer Lending?
Also known as P2P lending, it is the practice of lending money to individuals or businesses through online services that match lenders with borrowers. P2P lending is also known as social lending or crowdlending. It enables individuals to borrow and lend money without any financial institution as an intermediary and also extends credit to borrowers who are unable to get it through traditional financial institutions.
In recent times, this process has gained a lot of momentum among individuals and hence it is building a strong foothold in the financing sector of India. All P2P platforms are considered as non-banking financial companies and are regulated by the RBI.
Origin in India
Few years ago, anyone who wants to start a small business or need a loan for personal use usually applies through a bank. Once they submit the application, banks undergo a financial check of the particular individual by checking their credit score. In many cases, borrowers face rejection at the first stage due to which the loan process stuck in the starting only. On the other hand, many a time’s individuals avoid being charged high interest on loans. All this led to the origin of peer-to-peer lending where one can opt for an alternative way of borrowing funds.
As P2P lending means online lending or loans through the internet, many people are going online in order to get easy and fast loans, even with limited credentials. Here a person with low credit score too has a better chance of loan approval.
In India, RBI has regulated that all the registered NBFC-P2P must have a net owned fund of not less than 2 crores. This is necessary for the encouragement of the credibility of the industry. In 2016, there were over 30 peer-to-peer-lending platforms in India.
How it works?
P2P platforms connect borrowers to investors with attractive interest rates. Here, borrowers take loans from individual investors who are willing to lend their own money for an agreed interest rate. The profile of a borrower is usually displayed on an online platform where investors can assess these profiles to determine whether they would risk lending money to a borrower or not. A borrower might receive the full loan amount or only a portion of what he asked for from an investor. In case of the latter, the remaining portion of the loan may be funded by one or more investors in the peer lending marketplace.
In P2P lending, a loan may have multiple sources and monthly repayment has to be made to each of the individual sources. Furthermore, a borrower gets a favorable rate of interest on the loan than they may have gotten from any other bank. However, the interest rate is based on multiple factors and not only based on credit score, so everyone gets a chance to get fair interest rate.
The online financing sector in India experienced a high flow between 2013 and 2015. With transaction more than $50 million, around $2 million is distributed in the peer-to-peer lending loans. This number increased to $5.5 million in the year 2017. With this, P2P lending in India is projected an estimated worth of $4-5 billion by the end of 2023.
Also, with government initiative, India’s startup culture has seen growth recently. So there are many who need loan and that too at attractive rate of interest. These portals provide easy and fast loans to SMEs and MSMEs. Another important factor which has increased the focus of people is the movement of cashless transactions. With common man going the online way, the reach of this industry will increase too much extent.
Therefore, it can be said that P2P lending has all the features to become the face of the financing sector on India in coming future.