The Reserve Bank of India (RBI) has told peer-to-peer lending platforms to halt certain activities after inspections found rule violations and misleading sales practices.
About P2P lending
- The P2P lending companies often offer their services online. In fact, P2P lending is a transaction in which a person lends to another person through a RBI-regulated non-banking financial company (NBFC) platform.
- Borrowers apply for loans on these platforms instead of traditional banks, and they are matched with individual investors willing to lend.
- To participate, both borrowers and lenders must register by filling out an online form and submitting know-your-customer (KYC) documents, along with a bank account statement. Upon registration, the lender transfers the desired amount to an escrow account, from which funds are then directly transferred to the bank accounts of borrowers chosen by the lender
- The platforms act as intermediaries, facilitating this transaction and managing repayments. This helps lenders earn higher returns compared to savings and investment products offered by banks, while borrowers can borrow money at lower interest rates.
- In India, peer-to-peer lending is regulated by the Reserve Bank of India (RBI). In 2017, the RBI published a consultation paper on regulating P2P lending, and the final guidelines were released.
- For an investor, a P2P platform offers a potentially higher rate of return than a fixed deposit with a bank, though it does not guarantee this.
- For the borrower, the platform provides an alternative source of funds with potentially fewer hassles than the elaborate process required to access funds from a bank.
- At present, around 26 companies are registered as NBFC-P2Ps with the RBI. Some financial technology companies, or fintechs have tied-up with NBFC-P2Ps to offer lending services to their customers.
- Those who invest in a peer-to-peer lending site assume most of the risk that banks or other financial institutions normally assume.
