8/24/2021 All you need to know about peer-to-peer lending

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All you need to know about peer-to-peer lending

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2 min read . Updated: 24 Aug 2021, 01:18 AM IST

Neil Borate

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.
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Fintech firms such as Cred and BharatPe have recently launched peer-to-peer (P2P) lending
offerings. Mint looks at the promise and perilsClose
of this opportunity.

What is peer-to-peer lending?

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8/24/2021 All you need to know about peer-to-peer lending

It’s a system through which people can directly borrow money from each other. P2P platforms
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carry out some basic background and credit checks on borrowers, and allow lenders to choose
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which  borrowers to lend money to. Platforms also assist lenders through  mechanisms like
classifying borrowers into risk buckets.e-paper
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The loans given
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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.

Decoding P2P lending

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Decoding P2P lending

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
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8/24/2021 All you need to know about peer-to-peer lending

lender you should calculate your tax liability and pay self assessment tax. Interest is generally
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taxed under an ‘accrual’ system, so you pay tax on interest when it gets accrued and not when
HOMEreceive it in your bank
you actually LATEST
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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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