PEER TO PEER LENDING (Syllabus: GS Paper 3 – Economy)

Context: The Peer-to-Peer (P2P) lending industry is staring at a potential decline in new investments and subdued growth following the tightening of regulations by the Reserve Bank of India.

Peer to Peer Lending

• About: It is a form of crowdfunding facilitated through an online platform that matches lenders with borrowers for unsecured loans.
• Participants: Borrowers can be individuals or businesses needing a loan.
• Popular Platforms: Faircent, OMLP2P, Lendenclub, Finzy, i2ifunding, Cashkumar, Rupeecircle, and Lendbox.
• Regulation of P2P Lending Platforms
• Regulatory Body: These platforms are regulated by the Reserve Bank of India (RBI) and categorized as NBFC-P2P.
• Restrictions: Platforms must not engage in direct financial activities of lending money.
• Benefits of P2P Lending

oP2P lending companies operate online with lower overhead, making their services cheaper than traditional financial institutions.

oLenders can earn higher returns compared to savings and investment products offered by banks.

oBorrowers benefit from lower interest rates even after platform fees.

New Guideline of P2P

• Platforms are prohibited from offering credit enhancements or guarantees; any losses must be borne by lenders with necessary disclosures.
• Platforms cannot cross-sell insurance products beyond those related to the loan and must avoid credit enhancement practices.
• Loans can only be disbursed if all participants are properly matched and a signed loan contract is in place, with matching within close user groups banned.
• NBFC-P2Ps must deploy funds only as specified by regulations, cannot use one lender's funds to replace another's, and must disclose fees at the lending stage.
• Fund transfers between participants must be managed through bank-promoted trustee escrow accounts, with separate accounts for lenders and borrowers.