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Thursday, June 23, 2016

What is Peer to Peer Lending (PTPL)

Everything is getting online. Barriers are getting broken every day. From selling used stuff at OLX to booking a cab at Ola to buying groceries at Grofers. I have tried them all. But lending money online? Yes, PTPL is what it is called. Peer to Peer Lending....Read on...

What is Peer to Peer Lending (PTPL)
PTPL, as the name suggests, is the practice of large-scale lending of money between people online. In other words, it is an 'emarketplace' that hooks up lenders with borrowers.

What are the interest rates ?
PTPL interest rates are usually higher than market rates. Currently, you may get loans in the range of 12 to 18 per cent. 

Are PTPL transactions regularised? / Is there a monitoring agency?
Not really. However, the rising popularity of PTPL has caught the attention of banking regulator, Reserve Bank of India (RBI). RBI has said that they are studying peer-to-peer lending. While recognising the need for innovative products and services, RBI is also trying to bring up the risks that may emanate out of such innovations.

Who should use PTPL?
Though PTPL has been beneficial to people who are ignored by banks, RBI believes it must frame rules and regulate it owing to a few concerns. 

What are the Risks?
When money, investing and lending is involved, risks are bound to be there. But the key is to understand the risks and mitigate them as far as possible. PTPL does have the following risks in its current level of maturity:
1. The open informal structure and lax disclosure protocols is the first worrying factor. 
2. The quality of participants (lenders and borrowers) is not comforting. 
3. The presence of 'professional moneylenders' on PTPL platforms is another red flag. Professional moneylenders are people whose income comes largely by way of interest on loans disbursed. Though they are required to register themselves as 'professional moneylenders' under various state laws, they are barred from charging more than 2 per cent above maximum interest rates levied by commercial banks on similar-type loans. But average interest rates on PTPL platforms are way above bank personal loan rates and ergo, in contravention of state laws.

What do the Borrowers feel?
1. The response to PTPL has been nothing short of overwhelming, especially from borrowers
who want to consolidate or restructure their existing debt with cheaper options. Peer-level borrowing is a good option to swap expensive loans.
2. It is also a popular platform for small borrowers, who are usually not entertained by banks. Banks have strict requirements such as a high credit score, near flawless bank transaction records and permanent long-term employment with quality companies from potential borrowers. This practically excludes SME and start-up employees, and therefore PTPL serves as a great option there.
3. PTPL rates may be marginally higher than banks, but definitely cheaper than gold loans and loans from moneylenders

Examples of PTPL Platforms
1. PTPL platform Lendbox.in, opened lender-borrower registrations in December 2015. The platform has already signed up 2,000 borrowers and 900 lenders and mediated loans worth Rs 75 lacs in 50 days.
2.Faircent.com, which became operational 14 months ago, has facilitated loans worth Rs 2 crore to date.

What are the default rates on PTPL platform
Default rates are low in PTPL. As on date, it is less than 0.5 per cent on major lending platforms, who do take the pain of checking the credentials of borrowers to a large extent.

At some level, PTPL is a win-win for all parties. The borrower accesses funds, the facilitator pockets registration fees and commission (2-6 per cent of the loan) and the lender gets an opportunity to deploy his surplus funds more profitably. If you are a small borrower and banks have rejected your loan application, this is the platform for you. 

Like the article? 
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The book "From the Rat Race to Financial Freedom" has many such investment concepts explained in a very simple and uncomplicated manner, especially in the Indian context.


Manoj Arora
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