NBFC P2P Lending & Its Complete Working

NBFC P2P or Peer to Peer lending is the process of lending money to individuals or businesses through online portals. An individual or financial institution can become a lender at P2P lending and earn interest paid by the individual or business who has borrowed money.

P2P lending functions completely online and serves to connect such lenders & borrowers. A person (lender) who is looking to put his money somewhere his/her money lends it to another person (borrower) who is looking for finances. Through it, lenders can earn a higher interest rate on their investment which they may not earn from bank FDs or even some mutual fund investments. Also, borrowers get loans at much lower rates.

Moreover, online NBFC P2P platforms provide easy solutions for borrowers who might not be getting loans otherwise, from banks. Or those borrowers who need loans during an emergency. These requirements could be a medical emergency, buying consumer electronics, repay credit card dues, home renovation, business loans, travel loans, or other such needs. It is easier to borrow from NBFC P2P platforms as compared to traditional loans.

The risks attached to these investments for lenders are also higher than other financial assets such as mutual funds, equities, etc.

Processing and disbursement of the loan amount are much quicker at P2P lending platforms compared to applying for a personal loan at a bank.  You can say, the P2P platform is taking the banking model and renewing it completely to create a convenient lending and borrowing climate.

How P2P Lending Works

This is where the latest entrant in the NBFC segment – P2P platforms stepped in. From providing an attractive rate of interest to simplifying the entire process, these platforms have become very popular especially with small businesses. Becoming a better choice to raise funds.

All P2P lending organizations work for a profit. The fees paid by borrowers and lenders is part of the revenue they earn. By reducing processing time and expenses, such P2Ps manage to offer lower interest rates for borrowers as well as higher returns on investments, irrespective of market conditions.

To avail the service, borrowers need to pay a fixed origination fee, while lenders may have to pay an administration fee, depending on the terms of the NBFC P2P lending platform. The interest rates are usually determined by the portal. In most cases, these rates are set as per mutual agreement between the lender and the borrower.

P2P lending has seen significant growth in 2018. During January, the total P2P lending was between Rs. 5-6 crore. While by December, this amount raised to Rs. 20-25 crore.

Currently, India has about 30 P2P lending portals. Such as Faircent, i2ifunding, Lendbox, Cashkumar, Rupeecircle, etc. to name a few. The P2P lending expected to be generated in India over the next 5 years is around $ 4 billion. Whereas in China, the P2P lending is already touching $ 100 bn.

Most of RBI guidelines and NBFC registration process are quite same for a normal NBFC and NBFC P2P. In this article, we mention those that have been specifically laid down for such FinTech companies.

NBFC P2P Lending Process

Generally, the process works like this:-

First, a borrower goes through a quick soft credit pull with the P2P platform to determine initial eligibility. (Most platforms have strict criteria for credit history so that repayments are ensured). The platform operator evaluates their suitability by checking their credit history and their capacity to repay the loan. According to their assessment, the platforms assigns a “loan & risk grade”. This will help lenders to assess how much of a risk lending to this specific might be. Then the borrower lists his/her loan, including the interest rate they’re willing to pay.

On the other side, lenders review the listings, according to the amount of loan they’ll cover, risk grade, interest rates on offer, and borrower’s profile. The investor decides how much they want to lend, in total and separately, to each borrower. On a single portal or more. So the investor may choose to fund a single borrower, as per his/her selection, or to invest in various loans, carrying different risk elements, or even at different platforms (which may reduce the risk of losing all your money). Additionally, investors may choose the minimum interest rate and select the duration that is suitable for them. However, some investment decisions may be made by the platform operator or the investment manager.

Once lenders have selected, the amount from their escrow accounts, together, go into a single escrow account of the borrower and then into his/her bank account.

Most P2P lending platforms charge a fee from both investors and borrowers. Some may charge only from borrowers, and not lenders. Many portals also may charge a proportion of the ROI (Return on Investment) from the lenders.

Eligibility to Become an NBFC P2P

To obtain the NBFC license for P2P lending and a certificate of registration (CoR) from RBI, you need to have below before starting to work:

• Be registered as a company in India, under the Companies Act.
• A net owned fund (NOF) of not lesser than Rs. 2 crores, or more, as stipulated by RBI.
• On your application, RBI would verify and may grant NBFC certificate of  registration for providing P2P lending.
• All P2Ps are to be registered with the RBI as an NBFC. However, an existing NBFC is not entitled to operate as an NBFC P2P.

Registration Process & Conditions

NBFC P2P platform before commencing operations, must apply for a License to the Department of Non-Banking Regulation (DNBR) of RBI, Mumbai, in the specified form.

While considering the application, RBI checks that the applicant fulfills the below:

• The company has been incorporated in India.
• Directors and promoters of the company are fit and proper, as has been defined by the RBI. They must not be prejudicial to the welfare of the company or the public.
• The company has the necessary technological resources to offer services to the portal’s users.
• An appropriate capital structure is there to undertake the business activities.
• A robust and secure Information Technology System has already been implemented or a firm plan of implementation is there.
• CoR would be granted in order to serve public interest.
• A viable business plan has been laid down for conducting business.
• All other conditions as specified by RBI.

Once RBI has verified and is satisfied with the documents and applications, it grants in-principle approval.

The validity of this approval is 12 months from the date of such grant. And within this duration, the company must put the technology platform to work, enter into all other legal documentations required and report status of compliance. Then RBI, after being convinced that the institution is ready to commence its operations, grant CoR as an NBFC-P2P.

RBI made it necessary for all existing P2P companies to apply for a license to continue as a P2P platform, to protect the interest of lenders and borrowers. Since the provisions were laid down in October 2017.

All new entrants are to apply for a provisional P2P NBFC license from RBI to start operations in this sector.

This made sure that all P2P players are being regulated. This makes sure that they follow the rules in lending and borrowing.

RBI Regulations

RBI defines NBFC P2P as a non – banking institution involved in the business of a peer – to – peer lending platform.

The Reserve Bank of India (RBI) has regulated P2P lending to protect the interest of lenders and borrowers. As per its provisions, an NBFC-P2P is to become a member of all CICs (Credit Information Companies) and submit the data at regular intervals. So that all payments can be monitored and recorded.

Presently, there are 4 CICs in India — Credit Information Bureau (India) Limited (CIBIL), Equifax Credit Information Services Private Limited (ECIS), Experian Credit Information Company of India Private Limited, and CRIF High Mark Credit Information Services Private Limited.

A. Prudential Norms for NBFC P2P

NBFC Regulations and Directives from RBI which are to be kept in mind while lending or borrowing:

• At any specific point in time, a lender is not allowed to invest more than Rs. 10 lakhs total across all P2P Platforms.
• A lender is allowed to invest only up to a maximum of Rs. 50,000 for one borrower across all P2P platforms.
• The total loan amount taken by the borrower at a certain point in time should not be more than Rs. 10 lakhs.
• Maturity duration of the loans should not be more than 36 months.
• The company must have a secure Tech platform. Otherwise, it should get an in-principle approval and as soon as a secure technology platform is ready, they can apply for a Certificate of Registration. This approval is valid for 12 months.
• This company cannot hold funds or lend on its balance sheet. Moreover, no cross-selling is allowed on the portal, other than loan specific insurance products.
• NBFC-P2P is to maintain a Leverage Ratio of not more than 2.
• The company is responsible to conduct due diligence on all parties. It should have access to credit information for the participants.
• A declaration from each party that they are complying with these requirements.
• The company is liable for the actions of its recovery agents and others. The loan recovery practices of NBFC also apply to NBFC P2P.
• The transaction is to be between two escrow accounts, which shall be operated by a trustee. One for the lender and one for the borrower. The fund from investor is transferred to investor’s escrow account and never directly to the borrower’s bank account. This helps in checking the status of money laundering.

• This trustee shall mandatorily be promoted by the bank maintaining the escrow accounts.

• No international parties are to be involved.
• These loans are all unsecured.

B. Operational Guidelines

• NBFC P2P must have a Board approved policy in place –

1. • Setting out the eligibility criteria for participants.
   • Determining the charges on the services provided by it.
   • Setting out the rules for matching lenders with borrowers equitably and impartially.

• The outsourcing of any activity by NBFC P2P does not reduce its obligations. The entity shall be responsible for the actions of its service providers including recovery agents and the confidentiality of the personal information of the participant that is available with the service providers.
• No amount shall be transferred unless the individual lender/s have approved the individual recipient/s of the loan and all concerned parties have signed the loan contract.

• Detailed requirements prescribed on transparency, disclosure, grievance redressal mechanism, Fair Practices Code.

• Cash transactions are strictly forbidden. All fund transfers shall be through and from bank accounts.

• Establish rules and processes such as mandatory disclosure of certain information on the website, each lender approve each borrower loan, signing of loan contracts by participants, etc.
• Board approved IT/Security plan to be in place by following prescribed NBFC guidelines on the IT framework.
• Business Continuity Plan and reasonable arrangements to be in place, in case of closure/winding down of the NBFC P2P platform.
• Prior RBI approval with Public Notice required for any change in control/ownership of the entity.
• Quarterly reporting and Information Security Audit by CISA Certified Auditors once in 2 years prescribed.

C. NBFC P2P Reporting Regulations

As per NBFC Act, the P2P platform must submit a quarterly statement to the regional office of RBI within 15 days after the end of such quarter. The statement must contain details stated below:

• Number and amount of loans disbursed during the quarter, closed during the quarter, outstanding at the beginning and the end of the quarter along with the number of lenders and borrowers at the end of such quarter.
• The amount held in both Escrow Accounts, with separate details of the amount received from lenders and borrowers.
• The number of complaints received. Bifurcated as received from lenders and borrowers pending at the beginning and end of the quarter and disposed-off during this quarter.
• The leverage ratio along with details of its numerator and denominator.

RBI can prescribe the returns to be submitted by the NBFC P2P as it may deem necessary.

Cancellation Of CoR for NBFC P2P

RBI may cancel the CoR granted to an NBFC P2P if the company:

1. ceases to carry on the business of P2P Lending in India, or
2. fails to comply with any provision or condition of NBFC Act, subject to which the CoR has been issued to it, or
3. is no longer eligible to hold the CoR, or
4. at any time fails to fulfill any of the conditions as mentioned above, or
5. fails to –

• comply with any command issued by RBI, or
• maintain accounts, publish and disclose its financial position by following the requirements of any law or any direction or order issued by RBI, or
• submit or offer for inspection its account books and other relevant documents when so demanded by RBI.

Compulsory Disclosures

As per RBI regulations, an NBFC P2P has to disclose the following to:

To Lenders

1. Borrower’s:-

• Personal Identity
• Required amount
• Interest rate sought
• Credit score as arrived by the P2P platform
• Terms & Conditions of the loan
• Return
• Fees & Taxes

To Borrowers

1. Details of the Lender’s :-

• Proposed Amount
• Interest rate offered

Personal identity and contact details of the lender are not to be disclosed.

On Website

1. Method of credit scoring and factors considered.
2. Usage and protection of data.
3. Mechanism of grievance redressal.
4. Portfolio performance including the proportion of non-performing assets.
5. Broad business model.

The interest rates displayed on the website shall be in Annualized Percentage Rate (APR) format.

IT Framework & Data Security

The business of the NBFC P2P shall be primarily IT-driven.

Adequate safeguards should be installed in the IT systems to ensure the security of data.

Audit of the internal information systems shall be conducted at least once every two years by CISA certified external auditors. Their report to be submitted to the regional office of the Department of Non-Banking Supervision (DNBS) of RBI, within 1 month of submission of the report by the external auditor.

Reasonable arrangements must be in place to ensure that the loan agreements between the participants will continue to be managed by the third party, in case the NBFC P2P ceases to carry on the business.

About the Fair Practices Code

• A Fair Practices Code should be laid down by the NBFC P2P. It must have the approval of the Board and be published on the website of the company for information to its users.
• A warning must be displayed on the site that RBI has no responsibility towards the statements or opinions made by the NBFC P2P. And neither does it assure of any repayment of loans lent on it.
• Details about the participants must never be disclosed to any third party without seeking the permission of participants first.
• As per the Code, an affirmation from the lender must be obtained that the risks related to the transactions have been understood. That returns are not guaranteed and in case of default, there are also chances of losing the entire principal.
• It has to be mentioned that the recovery of debts is not assured by the platform.
• The platform shall make sure its employees are properly trained to deal with the participants in an appropriate manner and that there is no harassment such as bothering the borrowers at odd hours, use of coercion for recovery, etc.
• A periodic review of the compliance of the fair practices code and grievances redressal mechanism at different levels of management must be ensured by the Board.

Role of Credit Information Companies (CICs)

• NBFC P2P has to become a member of at least one CIC and submit all previous data.
• The credit information of the borrower should be maintained and updated regularly, either monthly or at shorter intervals, as the mutual understanding between NBFC P2P and CIC.

• Appropriate measures must be taken to ensure that credit information of borrowers is up-to-date, accurate and complete.
• Necessary declarations should be placed in the agreements with the participants that they have consented to provide the required credit information.

Benefits of Investing in NBFC P2P

The most significant benefit of using a P2P platform is that the process is very simple. Whether you want to invest or borrow. You can start anytime and from anywhere. Even from the comfort of your home. Moreover, the amounts involved are also low. The minimum amount that you can lend or borrow is Rs. 2,000 to Rs. 5,000, depending on the platform you are using. These P2P lending platforms also provide a detailed analysis of profiles of borrowers making it easier for you to decide.

Attracting Investors

Traditionally, banks and other financial institutions have been the source of credit. But their presence has been limited and the policy rules were limiting. So a large part of India’s population remained unbanked or under-banked. NBFC P2P has helped individuals channel their savings into an asset-class that helps them get a good return on their investment. This has, in turn, helped borrowers break away from exploitative manners of unorganized financing, become a part of the mainstream economy and access cheaper, faster finance.

More Options for MSME/SSI

The needs of small businesses are different from those of large corporations. Small businesses may need loans to meet a temporary shortfall in cash, pay salaries, execute a sudden order or expand. There are so many types of loans available. Appropriate to the diverse needs of the MSME sector that was reeling from liquidity crunch and high cost of credit. In fact, approximately 70% of all the P2P loans disbursed in 2018, have been to small businesses.

Low-Cost Loans

By directly connecting lenders with borrowers online, NBFC P2P removes intermediaries and their commission. This lowers the rate of interest. In India, the advantages of P2P lending were most obvious when loans from NBFCs got impossible due to the IL&FS crisis. MSMEs suffered a further setback as the repo rate was increased, increasing the interest rates on loans.

Due to its online, paper-less & presence-less process, the costs of administration and overheads are quite low. This adds to lowering the cost of financing.

Simplified Loan Process

One of the biggest reasons for the popularity of NBFC-P2P among businesses is the ease associated with it.

The process of accessing traditional loans is often cumbersome and time-taking. While time is money. Especially for MSME/SSI. NBFC P2P lending has cut the unnecessary processes leading to faster finance. And ensuring that the interest of both lender and borrower is safeguarded, at the same time. Credit-worthy borrowers get loans within minutes and once the loan agreement is signed, money gets transferred to their account within 24 banking hours.

Inclusive Funding

Banks have always been guarded about financing MSMEs. So small businesses missed out on many opportunities for growth. This gap is being met by P2P platforms with the use of technology-based algorithms that consider data points and list borrowers, who would otherwise be denied by banks and organized financing sector.

Funding Start-ups

Institutional financing has been elusive for young and new entrepreneurs. Usually, people in this category have never taken a loan or used a credit card. This means they have had no credit record and were denied loans. But this doesn’t mean that they are unable to repay loans. Investors on P2P platforms may support innovative ideas.

Empowering Women

Empowering women adds to the GDP of the nation. Empowering women entrepreneurs improve the economic prosperity of a nation and add to its development. Moreover, women borrowers also tend to repay on time, historically. Many women-centric loan products have been launched by different P2P platforms to encourage the advancement of this field.

Complete Privacy

RBI regulations ensure that the technology used by NBFC P2P is highly sophisticated and safe. Investors and borrowers never know each other’s identities. So that your private and financial details are secure on the website. Only that information is shared which is necessary to complete the transactions requested by you.

Further, RBI required these institutions to keep updating the system.

Buyback Guarantee

Buyback guarantees lower the risk substantially. It serves to add a protective layer over the investments. This guarantee works when a borrower misses repaying for a certain number of days. It is, usually, between 30 to 90 days. At the end of this period, the loan originator is obligated to buy back the loan either wholly or partly. Depending on how the buyback guarantee is structured, this will compensate investors for the remaining principal, some or all of the interest, and penalty fees. However, it is recommended to go through the agreement thoroughly to know how the payments will be calculated.

Stable and High Returns 

With P2P lending you get higher returns that are fairly stable. Generally, you can expect between 11 to 15% annually from your portfolio.

If you compare to mutual funds, the average returns are around 12% annually in a medium risk profile. And that too in the long-term. And, though investments in real estate get you a return of approx. 15 to 20%, the horizon is much longer too.

Or you may invest in the stock market, but it requires good insight into the company and the market development. You can earn a higher return but the instability cannot be ignored. Moreover, it not a passive investment.

Good Investment Option for Diversification

Although most mutual funds, bank deposits, insurance companies offer good diversification within the house itself. Still, P2P lending is a great way to diversify your investment portfolio.

This is really great way to minimize your overall risk.

Regulation of the Investment

You are well informed of all the details about the platform, borrower, the loan originators, the loan terms (agreement) and what to expect in return.

You can set up different loan strategies (auto investment, etc.) and change them whenever you wish.

Whereas, in stock market investments you can’t control it in the same way.

Convenience

Investments and making changes need only a few minutes. One can log on to the website, rebalance, and make adjustments, as required, in the account set-up. Just a few clicks and it is done.

Lower Conditions

Anyone can start investing. The minimum amount you can start investing with is also very low. From Rs. 2,000 to Rs. 5,000, depending on the platform. Most P2P lending sites don’t charge investing fees.

This means that you only need to have a little money invested in a single loan agreement. Thereby factor helps you diversify better.

The conditions to sign up and start to invest are very easy.

Promising Future

P2P lending worldwide has seen exceptional growth in recent years.

The platforms have become increasingly popular and more investors have found this opportunity.

Transparency Of The Process

NBFC P2P Platform Company has to share information about its background and services, compulsorily, on its website.

Risks of NBFC P2P Investment

Investing in the P2P lending sector can deliver high and predictable returns, however, the risks associated with such investments are something that investors should be aware of. The illiquid nature of investors means investors should be prepared to commit their money for the duration or be aware of the platform’s secondary market. The most obvious risk that the investors should consider is the borrowers defaulting on their loans. However, market and regulatory risks cannot be ignored when considering investing in the sector.

Borrower related: It is not so difficult to con an online lender by submitting various loan applications with fake profiles on P2P platforms. This has happened in China and could be copied by the fraudsters on P2P sites in India as well.

This kind of lending involves lending to people who could not get a loan, otherwise. Any lending has a risk attached. Similarly, in P2P lending, there’s a risk the borrower defaults in paying back the loan. There are possibilities of the borrower’s credit profile deteriorating after being listed on the NBFC P2P platform and raising money from multiple lenders.

Platform related: The P2P platform that an investor selects may not have a proper process of due diligence laid down. Or it decides to shut the operations while still in the process of getting registered with RBI. The risk of not getting all of your money back from lending is substantial. Some of the P2Ps not registered with RBI claim guaranteed high returns in their advertisements and websites. You must be aware of such false promises and losing the money. The risk of the lending platform going bankrupt is also there.

Money drag:  Investing in P2P loans have durations ranging from days to months and sometimes to years too. Once a loan has been paid off by the borrower, you have to check other borrower’s profiles to re-invest. Otherwise, your money will stay in the escrow account not generating any income. Or some people use the auto-invest function. But if the lending platform doesn’t have any loans matching conditions set by you, (e.g. interest rate, loan term), then also your money will stay in the escrow account that doesn’t generate any returns.

Criteria of Calculations: How the platform calculates what the loan to a particular borrower will earn or how the risk profile is determined is quite a complex process. And the information may be inaccurate.

Dependence: You are dependent on the platform to provide you information about the borrower. The investor doesn’t know whether the borrowers are actually making payments or not.

And how the rate of return is ascertained also involves a complicated process for an individual. Funds are being deposited and withdrawn. At different interest rates and for different durations. Some borrowers (most who actually end up paying the loan off) may also pay before time. Besides, when a borrower defaults, the account would go into collections. But the platform doesn’t provide information to investors on what it was collected from the defaulted borrowers if any.

P2P Dealing: There is always a possibility of the P2P platform preferring o put your money in deals it made with some big investors. Or the lending to such parties may be shown on attractive but biased terms.

There have been cases in Europe when the platform had made some deals with some large investors that gave them first shot at all the best lending opportunities.

Policy Changes: In India, this segment of the finance industry is still at its nascent stage. Such institutions have come under the regulations of RBI only since 2017. The provisions are still being set up and there is always room for improvement. Even in the European market, this kind of platform and its regulatory bodies were set up around 15 years back only. The asset class hasn’t been in the market for a long time. So there is a risk involved with policy changes and updates. It may involve bringing changes in operations, and this may adversely affect the parties involved.

Recovery Mechanism: We don’t know how good and effective is the recovery mechanism employed by the P2P firm to recover your investment. The platform may not be hiring qualified debt recovery and on-field agents in spite of charging fees.

Risk of Investment: The most significant risk is that your money is not covered your money, as opposed to deposits with most banks. No insurance or any form of protection is provided to the lenders in case of the borrower’s default.

No Tax Exemptions: The interest you earn is taxed, and you need to declare any interest you earn in your annual ITR filing.

Time constraints: With the wide variety of loan options available and the consideration, varying the portfolio takes time and effort.

Lower Liquidity: Such investments are much less liquid stocks, mutual funds, or bonds because of long-time horizons. Your cash flow depends on the loans you opt to finance. Most often, it is impossible to withdraw out of the agreement before time. And you would have to wait until the borrower repays them naturally, even if the NBFC P2P provides a facility for you to exit and sell loans to other lenders. Though you don’t lose your money, it could be very inconvenient in case of an emergency.

Technology Risk: Similar to fraud risk, many P2P platforms regard cybersecurity as an element that could have a detrimental effect on the sector. Given that the entire P2P transactions are done online, a severe cybersecurity breach is a real risk.

As mentioned P2P lending has not been around for long. Especially because it came around the recession of 2008. It takes a longer time than 15 years to establish a new asset class as a credible investment opportunity. With technological advances and the development of the Internet, this is becoming more relevant.

How to Minimize Risk of P2P Lending

P2P investing is as risky as any other investment if you are not well-informed and don’t take precautions. You have to understand how much money you are going to invest, how much risk you are willing to take if something goes wrong or you make a mistake and how to minimize the risk of this happening.

In all investments, the risk-return ratio is always there. Higher the return, the higher the risk. But some investment options are relatively low-risk that would get you a good return too. You just need to put in efforts to research and not put all your eggs in one basket.

To reduce the risk of default in P2P lending, it is advised to choose to lend to multiple borrowers. Always review the debt to income (DTI) ratio of the borrower while selecting. To calculate this ratio, consider your borrower’s total debt in a month and monthly income. For example, a borrower’s existing debt is Rs. 20,000 per month while his/her monthly income is Rs. 60,000, then the DTI ratio will be 33%. A low DTI ratio demonstrates a good balance between debt and income.

Ideally, 43% is the highest DTI ratio a borrower should have and still get qualified for a loan. But a ratio lower than 36% is preferred, and not more than 28% going towards EMIs.

The other key factors investors must check while lending on NBFC P2P platforms are the credibility of P2P lending platforms, ease, and simplicity of lending on them and check their defaulter rate.

Reducing risk is an integral part of increasing returns.

1. P2P Platform

In India, P2P lending is regulated by the RBI. RBI’s provisions were introduced in October 2017. And the framework, within which a P2P lending platform could be established and operate, was specified. Removal of ambiguity in any sector increases the confidence of the parties. Thus, the first recommendation is to select a registered and compliant platform.

Next, you should try to understand how it works before lending money on it. An investor should know the pros and cons of lending money on the platform.

An investor should check with the NBFC P2P about the overall volume, defaults, recovery process, and likely returns.

The experience of the platform in the business matters as well. If it has been here for a longer period, it may provide better support and services of collection support, legal support or customer service support.

The sites might be advertising about double-digit returns. But don’t put your complete savings in P2P lending. You must diversify. Moreover, it is always better to start with small amounts. Also, try to diversify into various investment options and P2P platforms.

2. Borrower

Sometimes a borrower is capable of repaying but defaults wilfully because he may believe that he will be able to get away with it. However, a certified NBFC-P2P has to report all delayed payments to the CICs every month. Defaults will negatively impact a borrower’s financial credibility and lower his/her credit score. This factor is significant to look at and choose the borrower to lend to. Besides, this acts as a deterrent to those who intentionally default.

Moreover, some P2Ps also undertake physical verification, so you should verify this point with the platform.

Lenders should try to understand the profile of the borrower. Review financial details like borrower’s average bank balance, quarterly bank balance, income tax return besides the salary or income mentioned, and make informed decisions when offering loans. One should also check with the NBFC P2P platform about the borrower’s family background, educational background, and number of dependants, city, gender, and employment status before going ahead with the loan.

3. Portfolio

The best way of managing risk is to diversify your investments. You can spread your money across loans. Diversifying protects the investment from risk caused due to exposure to only a few loans or loans of limited expanse. You can choose from personal to business loans, working capital loans or short-term credit lines for small businesses, and even loans focused on specific sections such as young professionals or working women.

4. Understanding Processes

Knowing about various tools available on NBFC P2P sites and using them also help lenders reduce risk by building a diversified portfolio in a faster and more efficient manner. It may be Auto-Invest – an option that works automatically based on criteria pre-set by you to invest your money. Or Fractionalization, wherein you can invest an amount as low as Rs. 500/- per loan.

5. Calculating Returns

Returns are calculated in P2P lending using NAR. NAR or Net Annualized P2P lending is the internationally accepted measure for calculating returns from the P2P lending platform, used by most fixed income instruments. It is like a fixed income instrument, where returns are given monthly. Understanding how returns are calculated, helps lenders keep a track. Besides, several tools to calculate risk appetite are also available on various NBFC P2P websites. They help lenders build an efficient portfolio that suits their risk appetite.

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Frequently Asked Questions

Q. What is NBFC P2P?

As per RBI directives, NBFC P2P is a non-banking financial institution which carries on the business of a Peer to Peer Lending platform. These lending platforms connect borrowers with individual lenders, who come together to make investments that meet the borrower’s loan requirements. The loans on P2P platforms are unsecured and, generally, the interest rates are higher than loans from banks and NBFCs.

So you can say that an NBFC P2P is an intermediary between the lenders and the borrowers. These participants must be registered with the platform and enter into an arrangement with the Platform.

Q. What is a Peer to Peer Lending Platform?

Peer to Peer lending platform, as defined by RBI, is an intermediary providing the services of loan facilitation via online medium or otherwise to the participants.

Q. Who is a Participant?

A Participant is a person who has entered into an arrangement with an NBFC P2P platform to lend on it or to avail the services of loan facilitation provided by it.

Q. Who can participate on an NBFC-P2P platform?

An individual, body of individuals, firm, HUF, society or an artificial body, whether incorporated or not can lend or borrow on the P2P platform.

Q. What is loan facilitation?

The facilitation of loans means connecting lenders and borrowers as well as carrying out the credit assessment and risk profiling of the participants on that platform.

Q. What is the process of registration for NBFC P2P?

The process of getting a company registered as a P2P platform is the same as getting NBFC registration.

As required by RBI, all existing and prospective P2Ps are to apply for registration to the Department of Non-Banking Regulation, Mumbai.

For new entities, the RBI shall grant in-principle approval for setting up and operating a P2P Lending Platform, after being satisfied that all regulations are being complied with.

Q. How to get NBFC P2P registration?

You can get your company registered as NBFC P2P with us. We are a team of experts providing express services, with experience of over 10 years in the field of company registrations.

Q. Who is eligible for registration as an NBFC-P2P?

Only an NBFC may carry out the business of P2P lending.

This NBFC must obtain a Certificate of Registration (CoR) from RBI.

An NBFC-P2P must have a net owned fund (NOF) of not less than Rs. 2 crores to seek registration with the RBI.

Q. What is the limit on the amount that can be invested and lent?

A total of not more than Rs. 10 lakhs across all P2P Platforms can be invested, with a maximum of Rs. 50,000 going towards one borrower. Across all platforms. There is no minimum limit set by RBI, however, the platforms may set one for their participants.

The total loan to a borrower must not exceed Rs. 10 lakhs.

Q. What is the duration of P2P loans?

The duration of loans can vary from a minimum of 6 months to 36 months.