All you need to know about peer-to-peer lending
PremiumFintech firms such as Cred and BharatPe have recently launched peer-to-peer (P2P) lending offerings. Mint looks at the promise and perils of this opportunity.
Fintech firms such as Cred and BharatPe have recently launched peer-to-peer (P2P) lending offerings. Mint looks at the promise and perils of this opportunity.
What is peer-to-peer lending?
It’s a system through which people can directly borrow money from each other. P2P platforms carry out some basic background and credit checks on borrowers, and allow lenders to choose which borrowers to lend money to. Platforms also assist lenders through mechanisms like classifying borrowers into risk buckets. The loans given out are mostly unsecured personal loans at high rates and high risk. Most loans are very small—less than ₹1 lakh and for very short tenors. Under the Reserve Bank of India (RBI) rules, investors cannot lend more than ₹50,000 to a single borrower and a single borrower cannot borrow more than ₹10 lakh.
Is it regulated by the Reserve Bank?
Yes, RBI came out with P2P directions in 2017. Under these, P2P platforms have to register with RBI and have a net worth of at least ₹2 crore. The platform must submit information on transactions and borrowers to credit information companies. An investor/lender in a P2P platform cannot lend more than ₹50 lakh across all such platforms. If an investor lends more than ₹10 lakh, they have to submit a net worth certificate from a chartered accountant to the P2P platform of at least ₹50 lakh. These limits have been placed to diversify the risk of investors. The maturity of loans cannot exceed 36 months.
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What are the returns like on these platforms?
According to a chart put out by LendDenClub, gross returns for Q1 of FY22 were 22.4% and default rate was 4.5% for its users. After adjusting for default rate and platform fees, lenders get 12%-15%. While evaluating a loan on this type of platform, take the default rate into account—your actual return will get reduced by this figure. These are pre-tax returns.
How much tax is levied on the returns?
Interest income is taxed as ‘other income’ and at slab rate. If your pre-tax interest income is 12% and you are in the 30% slab, the post-tax return after tax and cess comes to 8.25%. However, unlike bank interest, TDS is not deducted from P2P interest by P2P platforms. As a lender you should calculate your tax liability and pay self assessment tax. Interest is generally taxed under an ‘accrual’ system, so you pay tax on interest when it gets accrued and not when you actually receive it in your bank account.
What is the recovery mechanism?
P2P loans are unsecured personal loans. P2P platforms have different rates of default. i2ifunding.com data show a gross NPA ratio of 11.5% since inception. LenDenClub shows a default rate of 4.45% as of Q1 of FY22. Recovery policies also differ. Tele-calling is supplemented by legal action for large loans. LenDenClub takes legal action for loans above ₹20,000. Legal charges are borne by LenDenClub.
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