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Peer-to-peer (P2P) lending in India is estimated to grow into a $10bn industry by 2025. It is considered an effective solution for small and medium loan borrowers with no credit history or low CIBIL score to gain access to credit.

Peer-to-peer lending is a form of direct lending without engaging any financial institution as intermediaries in the transaction. The concept of P2P has been in India and the world as a whole for centuries. While the benefits of P2P lending to multiple stakeholders is high, its threats to the financial system have been underestimated due to the social good role that P2P lending plays in aiding financial inclusion.  

According to a report by PWC India, India has approximately 30 online P2P lending platforms with a current loan book circa of US $25 mn. The RBI has classified P2P lenders as a new class of Non-Banking Financial Companies (NBFCs). With the approval of the RBI, only an NBFC can register as a P2P lender. Some of these companies are projected to become the most significant disruptors in digitizing credit supply to not just individuals but also SME borrowers in India. 

How Peer to Peer Lending Works

P2P lending connects lenders and borrowers who both have a shared risk appetite. P2P lending provides high returns to investors; additionally, it is a very convenient funding source and likely to offer lower interest than traditional loans - a boon for Indian borrowers with low credit scores.

On the other hand, P2P lenders are expected to set up and maintain two escrow accounts (monitored by a bank-promoted trustee) - one for the disbursement of the funds raised by the lenders and the other for the redemption of money by creditors. Registered P2P lenders have access to data from credit bureaus to select applicants suitable to their risk appetite.

P2P lending consists of a relatively simple process that begins with filing an online application by the applicant, who generally tends to be a high-risk or small loan borrower. This is followed by auditing the risk and credit rating of the applicant. Accordingly, an interest rate is quoted to the borrower. Once accepted, the applicant shall choose from the available options - the quarterly interest charges and the principal balance redemption on maturity (if any).

The P2P lending service provider, i.e., the concerned platform, may charge all borrowers and investors a premium for its services. Some of these charges are as follows: 

The registration fee could cost somewhere between INR 100 to 1000. P2P platforms charge loan processing fees up to 2 - 4% of the loan disbursed. Other than this, they charge a late payment fee of INR 500 and INR 250 if the cheque bounces.

The Debate in Indian P2P Lending Market

After the October 2017 RBI Guidance, P2P lending and borrowing have seen substantial progress. But many P2P platforms are not content with the RBI's regulatory standards, which cap permissible lending or borrowing by a single lender or borrower to a maximum of 10 lakh INR or approximately 13,580 USD.

Also, a single lender cannot lend more than 50,000 INR to the same applicant. Platforms say these caps are poor and inhibit progress by preventing good net worth and keeping away institutional lenders. Although the cap of 10 lakh is inadequate, the RBI counters this view, stating that individual borrowers can be tempted to go overboard and ultimately default without capping limits.

However, many peer-to-peer lending sites operate a borrower insurance fund - a pool in which the service provider or platforms' turnover is stored. In case of credit default, this fund serves as security to the lender's principal sum, which is insured.

How Can P2P Uplift Indian Agriculture?

Uncertainties in weather conditions, inadequate use and availability of fertilizers and manure in the fields, and above all, ineffective support from the government and investment companies, leads to low yields which economically impacts Indian farmers in a negative way.

For an agriculture-driven market like India, where 70% of the population relies on agriculture as their primary source of income, P2P lending could be a revolutionary step for financial inclusion to the underprivileged in the most convenient way.

P2P service can certainly be a blessing for small-time lenders who can now sign up for a less time-consuming process and comparatively lower interests. One of the biggest beneficiaries would be a pool of 82% Indian farmers who are of small and marginal economic backgrounds. 

Conditions for The Registration of P2P

1. The business should be registered in India and have the requisite financial, entrepreneurial, and managerial tools to provide the participants with P2P lending services. 
2. It should have an appropriate capital base and management to conduct the P2P lending market. 
3. A Certificate of Registration (CoR) is issued to the company to represent public interest. 
4. The P2P should become a member of the Credit Information Companies (CICs). The responsibilities of the P2Ps include sending data (including historical records), retaining and maintaining credit records, and uploading the information to the CICs monthly. 
5. P2P’s are expected to register with the RBI with the declaration of loans disbursed - outstanding and closed - during the year and statement of funds kept on the Escrow account.

Faircent was the first P2P site to be registered in India. After its incorporation in 2018, it has processed about Rs. 169.12 lakhs (229,760.43 USD) with an average interest rate of 24.85%. As of 2019, the country as a whole has seen P2P loans of about Rs. 211.4 lakhs (287,200.54 USD). As P2P platforms grow by leaps and bounds, offering high returns with modest risks, they have drawn both inexperienced and experienced investors. Also, as per the World Bank estimates, India's credit demand and supply gap stood at around $380 billion, which can be closed down further, and P2P can play a crucial role in it. 

P2P lending is still in its inception in the Indian market, but with current regulatory developments, its advantages, acceptance in the Indian market by marginalized lenders and borrowers has been overwhelming. With the right financial literacy campaigns for the country's underprivileged section and continuous support from the government, Peer-to-Peer lending certainly has a bright future in India!