Peer-to-Peer Lending Regulations: What Borrowers and Investors Need to Know

16/02/2024 | 4 Comments

The world of finance introduces you to new financial technologies now and then. Recently, a financial instrument that is grabbing the attention of borrowers as well as investors is peer-to-peer lending. Also called P2P lending, peer-to-peer lending has changed the way people get access to funds as loans or invest their money.

And what’s better than having the comfort of doing tasks from anywhere anytime in the world? Moreover, there are a lot of advantages these P2P lending platforms provide their investors and borrowers with.
So, in this article, we will be talking about peer-to-peer lending regulations you must be aware of. The guide includes peer-to-peer lending laws and guidelines, how you can apply for a P2P loan, eligibility criteria, and more.

What Is Peer-to-Peer Lending?

In simple words, peer-to-peer lending is all about connecting borrowers with lenders without the involvement of traditional banks. So, individuals looking to borrow money can use these online P2P platforms to connect with lenders. These platforms match borrowers with investors based on their preferences and needs.

How Does P2P Lending Work?

It is quite simple to understand how P2P lending works. Borrowers apply for loans through these P2P platforms by providing information about their creditworthiness and loan requirements. Next, investors review these loan requests and decide which ones to fund. Once funded, borrowers receive the loan amount and repay it with interest over time. Now, investors earn returns on their investments through the interest paid by borrowers.

Eligibility Criteria To Get a P2P Loan

To qualify for a P2P loan, borrowers typically need to meet certain eligibility criteria set by the platform. This may include factors such as credit score, income, employment status, and loan purpose. Each platform has its own requirements, so borrowers should carefully review them before applying.

Risks Associated With P2P Loans

While P2P lending offers potential benefits, it also comes with risks. Borrowers may face higher interest rates compared to traditional loans, and there’s a risk of default if they’re unable to repay the loan. For investors, there’s a risk of losing money if borrowers default or if the platform itself encounters financial difficulties.

P2P Lending RBI Guidelines

P2P Guidelines

Here are the major RBI P2P guidelines:

  • P2P lending platforms need to register as non-banking financial companies (NBFCs) with the RBI.
  • Entities applying for registration must be companies under the Companies Act, 2013.
  • P2P lending platforms must have a minimum net owned fund of ₹20 million or such higher amount as the RBI may specify.
  • Platforms must follow prudential norms such as income recognition, asset classification, provisioning, and capital adequacy.
  • P2P lending platforms need to maintain separate trust accounts for funds received from lenders and borrowers.
  • Platforms must ensure transparency in operations and disclose information like terms of the loan, fees, and charges to both lenders and borrowers.
  • P2P lending platforms must implement adequate data security measures to protect the confidentiality of customer data.
  • P2P lending platforms cannot undertake fund transfer services or guarantee payment obligations on behalf of participants.

Tips for Investors

  • Investors should diversify their investments across multiple loans to spread risk.
  • Carefully evaluate borrowers’ profiles and loan purposes before investing.
  • Stay updated on the platform’s performance.
  • Adhere to risk management strategies to minimise losses.

Tips for Borrowers

  • Borrow only what you need to make repayments on time.
  • Compare loan offers to find the best terms and rates.
  • Be transparent and provide accurate information to improve the chances of getting funds.