P2P lending cap 50 lacs
As a major relief to the nascent P2P lending sector in India, RBI on 5th December 2019 increased the lending cap for individuals to INR 50 lacs. With this change, the current aggregate exposure for P2P lending across platform of Rs 10 lacs shall remain suspended.
The news can be found here on the RBI website under the Press Release section.
P2P lending in India
P2P lending has been active in India since the last decade with fintech players operating as technology companies. In 2017, RBI came up with the regulatory guidelines and issued a license to around 20 players active in India.
Here’s a list of active P2P lending companies licensed by RBI –
|P2P Lending Platform||Website Link|
These P2P lending platforms are registered with RBI as NBFC-P2P. The detailed regulatory guidelines can be found here on RBI website.
How P2P Lending Works?
With P2P lending, you leverage the marketplace provided by these fintech companies to lend your money to borrowers looking for loans.
The interest rate provided to the borrowers can either be determined by the platform based on risk assessment or can be set on reverse auction basis where multiple lenders submit their bids.
You may generate healthy double digit monthly returns by diversifying your money across multiple borrowers and by choosing the right borrower profiles.
The P2P lending platform charge you for managing the process, documentation & platform fees. So, choosing the right platform as well being aware of the historical risk-return trade-off is of utmost importance.
Another factor to look at is the regulatory guideline from RBI which earlier mandated a INR 10 lacs limit. This means you can invest a maximum of INR 10 lacs across multiple borrowers & platforms.
RBI has increased this limit to Rs 50 Lacs.
Impact of Increased P2P Lending Cap
P2P lending cap 50 lacs
One one hand, the increased lending limit will allow existing investors to scale their portfolio, while on the other it will attract new investors to venture into P2P lending. The lending limit of INR 10 lacs resulted in less interest from HNIs and other high income segments for considering P2P lending. The increased limit opens up the opportunity for these segments to establish P2P lending as a mainstream investment option.
Across the 20 platforms in India, there are approximately 0.2 million individuals who have invested in P2P lending.
Individuals investing in stocks markets, mutual funds which represent around 3% of Indian population may now start adopting P2P lending as an alternative investment asset.
Further, individuals investing in Fixed deposits schemes may opt for P2P lending because of its simplicity and higher returns.
In case of P2P lending, you can start with an amount as low as Rs 500 and you money comes back with interest from next month on-wards. This is easy to understand for masses in India as compared to stocks markets or mutual funds subjected to volatility. Also, in case of P2P lending you just need your bank account to start with. There is no requirement of having a Demat or Trading Account.
The tax implication is also quite straightforward. The annual interest earned is treated as an additional income & taxed as your income tax slabs.
Actions performed by P2P Lending Platforms
For simplicity, P2P lending platforms connect borrowers with lenders. However, there are a plethora of activities & operations performed in the background. While choosing a platform, you may inquire about the following details –
Machine Learning based risk assessment – Most P2P lending platforms have developed proprietary algorithms and credit processes to qualify borrowers. These algorithms consume application data, document data, field verification information and alternate data etc. to approve a loan. Generally the approval rate of a P2P lending platform would be in the range of 10 to 30%.
Home & Office Verification – Verification is a critical part of credit risk assessment. Most P2P lending companies verify the home & office location of the borrower with their own field teams or third party partners.
Transfer of Funds through Escrow Account Mechanism – As per the RBI mandate, P2P lending platforms can take funds from either the lender or the borrower. These funds are collected into an escrow account managed by a bank Trustee. P2P lending firms facilitate the transfer of funds to and from Escrow accounts.
Collection & Resolution – P2P lending companies collect money on behalf of the lender. The collection mechanism is quite similar to other banks & financial institutions. However, in case of default, the charges for legal process are borne by the lender. Also the NPA definition is similar – loans where the payment is delayed for 90+ days are termed as Non-Performing Assets.
Providing digital interface – You may either use the web application or a mobile app to start with P2P lending. The companies facilitate these digital interfaces at lower costs & easy to use front-end.
Repayment & Credit Risk
Borrower who fund their requirements by P2P loans enter into a legal agreement facilitated by P2P lending platform to pay back the EMIs at agreed terms & tenure. The funds are transferred from borrower to an escrow account into a bank managed by a trustee which subsequently transfers to lender’s bank account.
P2P lending platforms facilitate collections in case of delays and defaults. In case of delay payments, lenders get late payment fee & support from collection team of respective platforms. In case of default, the lenders may initiate legal proceedings to recover the amount. However the charges for the same are borne by the lender.
The credit risk is borne by the lender and as per RBI guidelines, P2P lending platform is not liable for credit risk and only facilitate transactions between lender and borrower.
How to start with P2P lending?
If you plan to lend or borrow money from P2P lending companies, you need to simply register by using your Mobile number & Email Id which are verified using an OTP. Secondly you need to furnish your KYC documents which includes a proof of residence, proof of identity and a recent photograph.
For borrowing money, you may need to complete an online application and submit required documents like bank account statement, salary slips, rent agreement, ITR, electricity bill to process the application. The requirement of documents varies from platform to platform.
For investing money, once you have registered, you need to link your bank account for transfer of funds. Once your P2P wallet is activated, you can start investing at a click of a button. Once the EMIs are received from the borrower, money is automatically credited to your account.
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Stay Tuned !
With a multitude of P2P lending platforms, choosing the right platform according your requirements might become overwhelming. To make it easy for you, we are shortly coming up with a series where we review each P2P lending platform with respect to a set criteria.
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