What’s happening in the P2P lending space?
For years, banks have been the traditional gatekeepers of loans, offering funds for everything from buying a home or car to pursuing higher education. Yet, anyone who has ever applied for a loan knows the experience can be a mixed bag—stringent scrutiny, endless paperwork, and the looming possibility of rejection.
Imagine needing a loan, only to find the door closed because your credit score wasn’t up to par. But what if there was another way, a path that bypassed the usual barriers and connected people directly?
Enter Peer-to-Peer (P2P) lending—a financial innovation that’s changing the game. Instead of relying on banks, individuals can now lend and borrow directly from each other, often with fewer hurdles and more flexibility.
What is a P2P platform?
P2P lending is a digital platform that connects borrowers directly with lenders. It allows individuals to lend money to others without the involvement of traditional financial institutions.
This benefits the borrowers in two ways:
- Less scrutiny
- Easy and fast disbursement
What is the fuss about?
The platform must not provide any assurance or guarantee for the recovery of loans. It also must not promote peer-to-peer lending as an investment product with features like assured minimum returns based on tenure, liquidity options, etc.
Some of the amended regulations include:
- No credit guarantee: Few fintech startups were giving credit guarantees, meaning they promised to repay lenders money if borrowers rowers failed to do so. Neither the regulator nor the platform, is responsible for such a loss; the lender must bear the loss.
- Change in fund transfer timeline: Previously, there wasn’t a specific rule on how quickly money had to move between these accounts. The new rules now require that any money received must be transferred within one day (T+1).
- No cross-selling: P2P platforms were selling credit enhancement products, which will now get banned, but the platforms can keep selling insurance protection products.
- Fee structure: Currently, P2P platforms charge fees based on how well they collect repayments. With the new rules, the fees will be a set amount or a fixed percentage of the loan amount. This means the fee won’t depend on the borrower’s repayment performance.
- No more closed group lending: NBFCs-P2P had created closed groups for certain partners who offered P2P lending. However, regulators have now made it clear that this practice of forming closed groups is not permitted.
The road ahead
Since India is riding the consumption wave, a lot of young people turn to P2P platforms to fulfil their wants.
As the P2P lending landscape evolves under the new regulations, both challenges and opportunities lie ahead. Experts in the industry feel that, though the new regulations pose challenges, in the long run they will be beneficial for the industry.
We have been always raising concerns about new-age investments just because of the regulatory risks. P2P is still in the nascent stage in India, and the sector still posses regulatory risks.