PEER TO PEER LENDING

PEER TO PEER LENDING

Subject: Economics

Context: Bank deposit rates have eased, and fixed income mutual fund running yields (portfolio YTMs) are much lower than earlier. In this situation, investors looking for relatively higher returns can eye an avenue known as peer-to-peer (P2P) lending.

Concept:

Peer to Peer Lending

• According to the RBI guidelines, ‘Peer to Peer Lending Platform means an intermediary providing the services of loan facilitation via online medium or otherwise, to the participants.’
• Participants are persons who has entered into an arrangement with an NBFCP2P to lend on it or to avail of loan facilitation services provided by it.
• The P2P lending is carried out through the internet platforms of the P2P lending companies.
• These companies charge a small commission for their services. Most of the loans are unsecured (no collateral) small personal loans.
• Peer to Peer (P2P) entities are to be regulated as Non-Banking Finance Companies-Peer to Peer (NBFC-P2P)s.

Regulations

• Online platform that acts as the P2P itself should not undertake any financial activity.
• Rather, it provides a platform for credit intermediation, bringing together borrowers and lenders. The purpose of regulations on the sector is ensure customer protection, data security and orderly growth.
• The interest rate may be set by the platform or by mutual agreement between the borrower and the lender. Fees are paid to the platform by both the lender as well as the borrower.
• Any entity that is not a bank, NBFC or an All India Financial institution would like to lend electronically, should get an NBFC-P2P registration from the RBI.