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Peer-to-peer lenders are now NBFCs

LiveMint logoLiveMint 26-09-2017 Shaikh Zoaib Saleem

The Reserve Bank of India (RBI) said, through an 18 September gazette notification, that peer-to-peer lenders (P2P)—companies that provide loan facilitation services from their platform—will be treated as non-banking financial companies (NBFCs). You can read the notification here.

While the regulator’s detailed guidelines for this sector are still pending, this development means that P2P companies are now recognised by the banking regulator. You may have come across various P2P lenders that claim to give very high returns. Let us first understand what exactly is P2P lending and how it works.

The P2P companies provide a platform or market for borrowers and lenders. Lenders have to register to use the platform. Some P2Ps charge a one-time registration fee while others earn their revenue based on how much is lent.

Borrowers too have to register. They are listed on these platforms under different risk categories, and the interest rates vary for each category. They are charged a registration fee and a processing fee too after they get a loan, which depends on the amount and term for which the loan is borrowed. Of course, they have to pay the agreed-upon interest on the loan. For now, the P2Ps have their own system of determining creditworthiness of borrowers. However, they too rely on traditional credit scores to a certain extent (read about it here.

With recognition as NBFCs, these companies can get credit records from the credit bureaus. For lenders, this means they too can take more informed lending decisions. Similarly, borrowers’ information from these platforms will get shared with the credit bureaus. This means, a P2P borrower too has an opportunity to build her credit history. 

The sharing of a borrower’s track record would reduce the risk of P2P platforms’ misuse. While the P2Ps can resort to legal action if a borrower defaults, the fact was that the defaulting behaviour was not recorded in credit history; and there was a chance that a defaulting borrower could try to borrow from other sources. This would not be possible when P2Ps start sharing information with credit bureaus. 

As a borrower who is unable to get a loan from banks or traditional NBFCs, the P2P platforms at least give an opportunity to borrow. However, you should always explore all options and must plan before any borrowing. Also, loans from P2P platforms can turn out to be cheaper compared to personal loans and credit card debt from banks or NBFCs.  

As a lender, too, you may prefer to invest in these platforms. One of the hopes raised by P2P platforms’ marketing campaigns is that the returns could be not just better than fixed deposits, it could even be better that from mutual funds. While this could be true in some cases, the biggest factor is that the risk in lending on P2P platforms is entirely yours. In most cases, the P2P platform do not even bear the legal expenses in case a borrower defaults.

So, it is better to wait for further guidelines for the sector from the banking regulator. However, if you are tempted to invest there, financial advisers suggest to invest a very small portion of your investments or wealth in P2P lending.

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