Explained: What is P2P lending and how is RBI making digital lending safer?

The emergence of the online economy and its possible effects do not exempt the banking sector. This is the main reason why it is grabbing the attention of regulators, analysts, investors, customers, and enterprises. One such business strategy that has gained popularity worldwide and is establishing itself in India is peer-to-peer (P2P) lending. The emergence of "Digital India" has opened up a wide range of market development opportunities due to the rapid advancement of technology. It is essential to remember that Peer to Peer services can only operate legally with RBI approval.

What is P2P?
P2P lending or Peer-to-Peer lending is a type of crowdsourcing used to fund loans that have interest attached. It can be described as the process of providing unsecured loans through the use of an internet marketplace that connects lenders and borrowers. A legal entity or an individual can apply for a loan as the borrower. 

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P2P lending, to put it simply, is a financial arrangement made between a lender and a borrower without the involvement of any third parties, such as a bank. By thoroughly evaluating each party's eligibility for these digital transactions, the internet organisation that is arranging this peer-to-peer exchange will serve as the risk mitigator between these two parties.

How much will be the interest rate for the borrower and lender?
The platform may decide on the interest rate, or the borrower and the lender may agree upon it. Both the lender and the borrower must pay fees to the platform. According to their risk categorization, the borrowers pay an origination fee that may be a flat rate or a percentage of the loan amount raised. Depending on the rules of the platform, the lenders may be required to pay an administration charge as well as an additional fee if they decide to use any other services (such as legal counsel, etc.) that the platform may offer. 

The platform offers the ability to gather loan repayment information and provide a preliminary evaluation of the borrower's creditworthiness. The fees cover both the price of these services and the overall costs of the business. Instead of profiting from the disparity between lending and deposit rates, as is the case with conventional financial intermediation, the platforms handle the credit scoring and generate money through arrangement fees.

What are the benefits for the parties involved?
The fact that lenders can generate significantly better returns than bank savings or investment choices, and borrowers may be able to borrow money at cheaper interest rates, stands out as an advantage for both parties. 
Lenders and borrowers will be able to trust a P2P platform with confidence and without worrying about possible fraud thanks to this barrier to demonstrating its validity.

What are the documents required for P2P lending?
Aadhar cards, PAN cards, and other common KYC documents would all be needed. In addition to the CIBIL score, P2P Platforms will utilise additional metrics to analyse loan applicants. These metrics include historical performance, stability, and intention of borrowers, which are assessed using documents like pay stubs, ITRs, bank statements, balance sheets, etc.

The loan conditions are established after the P2P platform completes the aforementioned verification process. These criteria are the loan size, interest rate, and loan term. The loan will then be approved and disbursed within a few business days.