Who can look at P2P borrowings and who should not

By Rajat Gandhi
As popularity for P2P lending grows, the question that everyone is asking is "is it meant for me?" While there is no yardstick to measure on who should look to borrow on a P2P platform, because of its inherent nature, it can be particularly beneficial for some.

a) Someone with a good credit record - If you have a good history and rating, banks would love to lend money to you. Banks and other financial institutions like lending to people they consider as a safe bet. This is also true for a company where banks generally chase firms with a good business model and credit history. For an individual or a company with good credit history, the borrower can look at P2P platforms to drive down costs even further. One can expect significantly lower interest rates on a P2P site. Through the mechanism of reverse auction a borrower can pit lenders to offer the most favorable terms and conditions, thus ensuring the best deal possible. While financial institutions have a certain threshold when it comes to interest rates, lenders at P2P sites are free to go as low as they want with their rates. This means a borrower can at times borrow at rates that are lower than benchmark rate.


b) Consolidate debt - There are times when your total debt becomes difficult to manage. This can be in the form of credit card dues and EMIs of existing loans. The same may hold true for your business. In such a scenario, it's best to calculate all your dues and then opt for a low interest P2P loan. P2P loan rates are half of what credit cards charge as interest and even lower than personal loans that Banks provide.

c) Businesses which have no access to capital - There are businesses that find it uncannily difficult to raise money from banks. This can either be the stage of your company (a startup) or the nature of your business that make it very difficult to borrow from Banks/NBFCs. Even if you do manage to borrow, the cost of capital is high and this puts the burden on the business. It is well documented that small businesses find it particularly difficult to raise money from financial institutions. P2P can be a great place to raise debt from individual lenders.

d) Services businesses that are asset light - A vast majority of India's businesses is in the services domain and for such firm raising money from banks is often difficult. Banks want collateral as a safeguard for the money they extend but asset light companies in the services sector often have little or no collateral to pledge. P2P lenders demand no collateral for the loan they extend and this makes it easy for businesses in the services domain to tap.

e) People who are refused loans - Banks often reserve the right to refuse your loan and this can be exercised even if you have a good credit rating and fulfill all eligibility norms. Banks are known to refuse loans to people who are a part of a community or live in a certain area. For example, people living in un-authorized colonies would find it very difficult to raise money from banks. Even the Sachar Committee Report on Minorities in 2006 has stated that "the committee was given to understand that some banks use the practice of identifying 'negative geographical zones' on the basis of certain criteria where bank credit and other facilities are not easily provided. P2P is democratic in nature and does not differentiate on the basis of where you stay or what community you belong to.

Who should not?

Currently P2P does not support very large loan requirements. So, if you require several crore in money, it may be difficult to raise a very large sum on the platform. Also, if you are planning to take a long term loan, say for about 15 years, a P2P site may not be the most ideal. Alternatively, the ideal situation is when you can raise money from friends and family. Often in such cases interest does not apply and this form of borrowing can be absolutely with no strings attached.

(The writer is Founder, CEO of peer to peer lending marketplace, Faircent.com)