Do you want to be a bank? With peer-to-peer (P2P) platforms, just like a bank, you too can be a lender to borrowers if you can stomach the risks. Over the past few weeks, P2P platforms like LenDenClub, Finzy, Monexo, Cashkumar, OMLP2P and Faircent have received certification of registration from banking regulator Reserve Bank of India (RBI), reports say. With RBI regulating these platforms as an NBFC or P2P Non-Banking Financial Company (NBFC), there is now a legal and recognised structure.
Do remember that the P2P platforms will act only as an online intermediary and a facilitator between different parties. While the P2P lending platforms are supposed to undertake due diligence on the participants including credit assessment and risk profiling of the borrowers, as a lender you will have to bear all the risks just as a bank does. The payoff for a good lender is attractive, with the potential to earn 20-30 per cent annual interest which is taxable. Let us analyse this issue and tell you about the things you must watch out for before deciding to become a P2P lender.
Who is eligible to become a lender?
Just like there are fit and proper criteria to become a bank, the RBI regulated P2P platforms have their eligibility rules to become a lender. As an individual, you must be 18 years (minimum) to 80 years (maximum), hold a valid PAN card and Aadhaar in India, have a valid proof for an address in India, have a valid bank account in India and valid mobile number in India and an e-mail ID.
Some platforms have additional requirements such as lender has to have an annual income of more than Rs 3 lakh (take-home salary of Rs 25000 per month) or net-worth more than Rs 10 lakh. Some may ask for signature verification from your bank, a copy of passport, phone bill (postpaid), 3-month bank statements and proof of income (ITR).
Your identity i.e email-ID, mobile number and photo are completely protected and not visible to any other member of the P2P portal. However, in most cases, your name will be shared with your borrower after signing the agreement.
Fees lenders have to pay
Just because you have money, it does not mean you can immediately start lending to P2P borrowers. There are registration fees that some P2P platforms will ask you to pay. These will range from Rs 500-1,000 plus GST at the time of signing-up. Finzy and Monexo do not at present charge registration or account opening fees.
Some P2P platforms charge money in form of facilitation fees from the lender. The platforms argue that in this way they earn a small fee, only when lenders make money.
In some platforms, the facilitation fee is charged on the interest you receive. This fee will only be charged if you receive EMIs. This can be between 1 and 4 per cent.
There may be charges such as an exit/withdrawal fee of 0.10 per cent of the amount withdrawn from the account.
Some platforms levy fees plus GST for the amount of funds collected from borrowers. Others charge a processing fee of about Rs 2 to Rs 5 on every EMI that is transferred by the borrower and a facilitation fee on each loan.
There can be loan processing charges as well. Do remember transaction fees are deducted from the first EMI.
Borrowers and P2P platform’s role
Listed borrowers across platforms are salaried employees or entrepreneurs. As a lender, you can see their personal, professional and financial details and these are supposed to be pre-verified by the P2P platform.
Do remember that P2P platforms only facilitate a virtual meeting place between borrowers and lenders on their online platform. The decision to lend money to a borrower is entirely at the discretion of the lenders that is you. In most platforms, your money is not insured and is not risk-free. However, Monexo claims it has a Credit Shield, a specialised group insurance policy which helps protect lenders from some specific event-based risks that might affect a borrower’s ability to make loan repayments.
P2P platforms are supposed to assess the creditworthiness of borrowers. This is done by using a proprietary algorithm for credit scoring. They also assist in the execution of agreements and documentation between borrowers and lenders. Another task is maintaining custody of documents. While they facilitate timely repayment of loan installments, they cannot guarantee anything.
Reduce lending risk
Based on the RBI master directions, there is an upper limit of Rs 10 lakh that can be invested across all P2P lending platforms. You can lend for the tenure of 3 months to 36 months based on your repayment expectation.
Before lending, look at the borrower’s loan need, any platform rating/score for the borrower, gender, age, marital status, educational qualification, employment sector, number of years of experience, net annual income, existing loan details such as existing EMI.
As a lender, you can decide whether to give a loan to a single borrower or multiple borrowers. You can also decide the exact amount that you want to lend to a single borrower. Typically, the minimum amount you can lend is Rs 750-1,000 per loan. Some platforms have caps on the maximum amount that you can lend to a single borrower, safeguarding your interests in a single investment. As a lender, your job is to get your money back with interest.
As a lender or a bank, your goal should be to lend money to profiles that carry the least risk. Do not go for high risk and high return borrowers. Start small, by giving small amounts of loans to a well-diversified group of borrowers. You should lend to different kinds of people.
Some P2P platforms have the unrated borrowers’ category. These borrowers are with limited credit history. Typically, they are ready to take loans at higher interest rates. But such borrowers bear a very high risk and loans to these have an increased potential to default. Carefully consider the risk involved before offering loans to such borrowers.