All you Need to Know About Peer to Peer (P2P) Lending

Peer To Peer (P2P) lending meaning ‘is an alternative method of financing that enables borrowers to obtain loans directly from lenders, thereby cutting out financial institutions as the middle man. It is also known as “social lending” and “crowdfunding” and has been in existence since 2005. 

P2P lending enables investors to earn superior returns through principal and interest payments whilst aiding others to achieve their goals, primarily due to the fact that banks/NBFCs are cut out from the equation as middlemen. 

How Peer to Peer Lending (P2P) Works

Peer to Peer (P2P) lending works by bringing together borrowers and lenders on a common platform. Lending can be done directly between both the parties. 

By doing this the middle man, such as banks, are cut out which allows investors to earn a healthier return from principal and interest payments while aiding borrowers to achieve their goals. 

For lenders the process begins when they sign up to the platforms and invest their surplus funds post completion of documentation. Post that lenders make offers to potential borrowers whilst keeping in mind the tenure they want to loan for. For borrowers, the process starts by signing up on the platform and providing basic documentation such as identity proof and post this a credit check is done on the borrower. 

What fees do Peer to Peer Lending (P2P) Charge

The fees which are charged from lenders on a P2P platform usually ranges between 1-2%, however, this can vary from company to company.

The fees which are charged from borrowers on a P2P platform usually range between 2-5%, however, this can vary from company to company. 

For the borrower, these fees are levied over and above the rate of the loan.

Is Peer to Peer Lending (P2P) Safe

P2P lending is relatively safe, however, the below factors need to be kept in mind before investing: 

1. The credit score of the borrower: this will help ascertain the risk level that is being taken on by choosing such a borrower. The primary risk is the risk of default.
2. The borrower profile: whether the individual is salaried or self employed. If self employed the nature of the business can be looked at and if the individual is salaried then their designation and company can be looked at. 
3. The purpose of the loan.
4. Ensure that the amount invested is diversified over a large pool of borrowers to manage risk: the amount being invested should be deployed to various borrowers of different risk profiles to balance any default that may take place. 
5. Check the default rate: this will tell an investor the likelihood of default (the likelihood that payments may be missed). 

Advantages and Disadvantages of Peer to Peer Lending in Business:

Advantages	Disadvantages
Higher returns to investors	Credit Risk
More accessible source of investing	No insurance or government protection for P2P lending
No middleman	Not available at all locations
Lower interest rates
Risk diversification
Choice of borrowers based on their credit score
Easy Liquidity
Quick and convenient application process since its online

Regulations  

P2P Lending is regulated by RBI in India

1. Exposure of a lender to all the borrowers cannot exceed INR 50 Lakhs.
2. Any lender that invests over INR 10 Lakhs must provide a certificate (signed by a practising Chartered Accountant) that shows their net worth is INR 50 Lakhs.
3. Funds will be managed through an escrow account.
4. Escrow account with be operated by a bank promoted trustee for the transfer of funds.
5. Two escrow accounts are operated, one in which money from investors is received and to be disbursed and one in which collection from borrowers takes place.
6. Cash transactions are prohibited.
7. Aggregate loans taken by borrowers (total exposure) is capped at INR 10 Lakhs.
8. Maturity of loans shall not exceed 36 months.

Who should invest in Peer to Peer Lending (P2P)

• Widely suitable for borrowers since they can achieve better interest rates as compared to bank deposits and other financial institutions. 
• Widely suitable for investors as well due to the fact that there is no middle man, hence they are able to achieve a higher rate of return.

Taxation on Peer to Peer Lending (P2P)

1. The interest income received by lenders is taxable however there is no tax levied on the principal amount. 
2. Interest income from P2P lending must be reported under section 56(2) of the Income Tax Act which is “income from other sources” under column B3 under ITR1.
3. The rate of tax is not predetermined, interest income is added to the total income of the lender and taxation is applicable as per income tax slabs. 

Frequently Asked Questions (FAQs)

1. How it Works?

Peer to Peer lending works by bringing together borrowers and lenders on a common platform. Lending can be done directly between both the parties. By doing this the middle man, such as banks, are cut out which allows investors to earn a healthier return from principal and interest payments while aiding borrowers to achieve their goals. 

2. How Safe is P2P Lending?

P2P lending is relatively safe, however, there are certain factors which need to be kept in mind as have been discussed above. 

3. Is P2P Lending Legal in India?

P2P lending is regulated by the Master Directions for NBFC Peer to Peer Lending Platform issued by the RBI in 2017. Only an NBFC can register as a P2P lender with the permission of RBI. Every P2P lender should obtain a certificate of registration from the RBI. 

4. Who Offer P2P Lending?

There are various institutions that offer P2P lending services, some of them are as listed below: 

1. Faircent
2. Liquiloans

5. How to Invest in Peer to Peer (P2P) Lending With Nivesh?

Any investor can enjoy the benefits of investing through Nivesh in the following easy steps:

1. Create an account in Nivesh by providing your basic details. (If you already have an account then just login into your account)

2. On your portfolio page click on the Buy New tab at the right top corner of the screen.

3. Select P2P and choose the scheme you want to purchase.

4. Your request will be generated and a relationship manager will get in touch with you for getting the investment done.