The Peer to Peer lending can be defined as a mode of business where a platform in digital form is provided to an individual or an entity for raising loans or fund at certain interest rates and is needed to be paid back as per the specified terms and conditions.The interest rates are either set by the lending organization or after mutual discussion between the borrower and lender etc.
In India ,the Peer to Peer[P2P] lending business has been extended to 5 billion dollar as per the reports being concerned.Therefore the entrepreneurs and startups business can easily avail loans from this platform without much documentation.
In such lending there is no involvement of any financial institutions and banks and the lenders are free to choose the borrowers whichever they want to give loans. This form of lending money is getting very famous among investors as they get a higher rate of return through the Peer to Peer[ P2P] lending business.
The Peer to peer lending companies are being regulated through Reserve Bank of India [RBI]and therefore reserve bank of India reserves power for providing lending license to the applicant.
- TYPES OF PEER TO PEER LENDING MODEL –
There are namely 03 types of model being defined below ;
A] CONSUMER LENDING –
The consumer loans involve small personal loans taken by the individual for purchase of car , bike , marriage expenses , home repairs , Repayment of credit card etc.
B] SMALL BUSINESS [SME] LENDING –
The loans provided to small businesses for various purposes such as asset finance , working capital , business to be extended etc .
C] PROPERTY LENDING –
Under this lending ,the applicant borrows loan for purchase of property ,commercial ,refurbishing of house etc .
- ELIGIBILITY TO APPLY FOR PEER TO PEER LENDING LICENSING –
In india one needs to fulfil certain conditions in order apply for the peer to peer lending license-
1] A company should be registered
2]The applicant shall have adequate amount of capital structure
3] The applicant company shall have technological , managerial ,
4] A pure motive to serve the public and its interest
5] a proper business layout and plan
6] The board of directors shall fulfill all terms and conditions of RBI
- PROCEDURE TO OBTAIN THE LENDING LICENSE –
Any company being registered as private or public limited company can apply for the license with the reserve bank of India.They need to fulfill the conditions below –
1] The applicant company must be registered as a private or public company under the eyes of law and have an objective of doing financial financing of money.
2] The Minimum net owned fund should be Rs.2 crore .
3] There should be efficient information technology system i.e mobile application for the workflow
4] The online application form is available at the RBI website.
5] The hard copy of the application together with required documents to be submitted to the office of the reserve bank of india.
6] After doing detailed and vigilant verification of the application and documents attached with it , the RBI provides the license certificate to the applicant company .
- MERITS AND DEMERITS OF PEER TO PEER LENDING PLATFORM –
There are various merits and demerits of peer lending platform for both borrowers and lenders and these are highlighted below –
FOR BORROWERS :
A] MERITS –
1] The first and foremost benefit is the amount of loan received is either at fixed rate of interest or low interest rate as compared to other financial institutions .
2] The documentation is very simple and easy as compared to documents required while taking loan from financial institutions
3] The fees and other charges required are low as compared to banking institutions
B] DEMERITS –
1] There is high use of information technology and there is a lack of security as documents can be leaked or information can be wrongly utilized.
2] The amount of loan provided is less as compared to the financial institutions.
FOR LENDERS :
A] MERITS –
1] The return of the investor is higher as compared to the risk taken
2] The investor is happier as he has diversification and more places available to invest his capital and earn more.
3] In peer to peer lending ,the lenders communicates with the borrower directly to finalize the deal
B] DEMERITS –
1]The risk factors involved here are higher and uncertain as compared to the banking financial institutions
2] The returns are lower in comparison to public traded index fund
3] The future possibilities are uncertain and unrealistic and it’s too early to make future opinions of this type of industry