The slow rise of P2P lending: Moneylenders are back in business..

How things keep coming in circles especially in finance. The terms/names can change but in the end it is just some old wine in a new bottle.

Here is an interesting story of which is a Peer to Peer lending portal. It is not a classic moneylender which lent from its own capital but more an intermediary between lenders and borrowers:

P2P is a simple concept, but its very nature mandates a robust system for assessing the creditworthiness of borrowers. To make that cut, i2i gathers as much information as possible about people looking for loans (yes, it looks at their social media profiles as well), collects all relevant documents and verifies them. Each profile is then automatically analysed and put under one of the three tabs – Accepted, Rejected and On border. Next, its underwriters manually go through the borderline cases and ask for more information to give them a specific status. They also list the strengths and concerns regarding each ‘Accepted’ borrower, taking into account factors such as incomes, liabilities and CIBIL scores. The company receives an average of 4,000 loan applications every month, out of which only 50-60 per cent people complete the entire application process and out of that, only 60-70 applications get accepted, says Singh.

The start-up has also initiated a ‘One loan, One Interest’ policy for every risk category. “There is no pre-defined interest rate in the P2P space and rates mostly depend on negotiation skills,” he explains. In a bid to standardise that, i2i has classified all its borrowers into six categories (from A to F, where A denotes the least risk), and each category comes with a predefined interest rate in proportion to the risk involved. For instance, people under Category C (mid-risk segment) pay 17.5- 20 per cent interest on loans while Category F, the highest-risk segment, has to pay 25-36 per cent. It also means lenders can choose the interest they want to earn and the risk they are willing to undertake. The loan tenure varies between six and 24 months but can be stretched up to 36 months.

As per the start-up’s policy, an investor can only lend up to 20 per cent of the loan amount required by a borrower. It means one’s investment is split into tiny slivers and given to several borrowers so that even if one defaults, others will pay the investor back.

The company currently makes money from the fees paid by its registered users. While investors pay a one-time registration fee of `500, potential borrowers just need to pay `100. Additionally, an investor has to pay a service fee, which is 1 per cent of the total amount invested on the platform. Again, based on the risk profile, a borrower has to make an upfront payment of 3-6 per cent of the loan.

The interest rates are striking here. Similar rates were charged by moneylenders but were seen as really high which led to a movement against moneylender practices.

Will be interesting to watch this space of old wine in new bottle …


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