Why do we Need P2P Lending in India?

This is a guest post by Sunil Kumar, CEO of Loanmeet

Tragically, more than 78% of Indian population cannot get a personal loan from a bank or NBFC. Why? The reason is quite simple – most banks grant personal loans to salaried employees with annual gross salary above Rs. 3 Lakhs. Some banks give personal loans only to individuals earning Rs. 6 Lakhs per annum. If an individual is NOT working at one of the big MNCs or listed companies, then it would be a difficult for him to get a loan, or worse yet, his/her interest rate would be substantially higher. The P2P lending however, works differently; it comparatively uses multiple parameters to determine credit-worthiness of borrowers. The P2P credit models traverses beyond the salary of individuals; and fortunately, it does not decline the loan application even if the borrower’s salary is considerably low.

P2P lending, peer-to-peer lending amongst individuals, is not a new concept. It has been practiced for centuries. Even today, most individuals ask money for their short-term needs from friends and relatives. In old days, most individuals did not make EMI payments when they got loans from their friends and relatives; most loans were interest free, and as a victim of the evil perception of temporary profitability and eventual losses, there was a balloon payment at the end of the loan period. The private money lenders charge high interest rates, and seize land or jewelry for collateral. The online P2P lending model formalized the entire process of taking loans from friends, relatives, and unknown individuals, and made it simpler for us to get quick cash or earn great returns. The borrower puts an online loan application, and the platform either rejects or accepts the same. If the loan application is approved, then the lenders fund the loan amount. The loan payment is collected in the form of EMI payments, and sent to lenders.

Most loan underwriters believe that low salaried employees, less than 3 L per annum, would default, or delay their loan payments. The reality is quite different. The low-salaried employees consider loan payments as their moral obligations, and pay loan amount on or before time. There are always exceptions however, and some low-salaried employees would delay or default their loan payments. In India, unfortunately, few poor farmers committed suicides because of getting spiraled into debt and their incapability of making EMI payments. Whereas, the owners of rich companies declare bankruptcies, and continue to live lavish life. There are multiple other reasons why banks do not want to cater to low-salaried individuals; the ticket size of loans are small, and it is difficult for banks to make money on small loans. If an individual had a settlement 5 or 10 years ago, then he/she might not be able to acquire a personal loan from a bank. P2P lending platforms have built new credit models that can cater to loan requirements of most individuals. Since the platform is online, it can reach out to most individuals.

Why should a borrower go to a P2P lending platform instead of walk-in to a bank for a loan? Well, the banks, by and large, ask us to submit a ton of documents that necessitates to make multiple trips to the bank branch, thereby consuming much more time than anticipated to get a loan application processed. At P2P lending platform, your loan application is approved within a day, and you could obtain funds in less than a week. You would quickly get to know whether lenders are interested in funding your loan request or not. The process is transparent, and seamless to all parties. In the coming years, it will be possible to get an emergency loan request dealt with online through mobile phone on P2P lending platforms, and get the requested loan amount acknowledged in the bank account in minutes, and not days or months.

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One thought on “Why do we Need P2P Lending in India?

  1. I find the article interesting and have read so many articles about P2P lending but unable to convince my self to start lending on these platform.

    They use multiple criterion is used to judge the viability of a borrower credit score, consumer data including the digital footprint of customers arising out of social networks, ecommerce, mobile usage and geo-location etc. They use these metrics to create their own score and then link borrowers to lenders. The risk involved from a lenders perspective is the risk of default and how to manage it – one method is diversification. But is it the only method!? If lender provides a non collateralised loans then what incentive other than moral obligation and possible down rating of score does the borrower have? Which law can be enforced for the recovery of the loan? Since a person as an entity carries, unlimited liability can his or her personal assets be sold to ensure the loan is repaid?

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