Peer-to-peer (P2P) lending is a revolutionary way where borrowers seeking personal loans connect with individuals willing to lend, bypassing the traditional banking system. It offers lenders an alternate investment opportunity while giving borrowers a streamlined way to fulfill their immediate financial needs through trusted platforms.

P2P lending in India works through registered platforms that connect individuals seeking loans with potential lenders. Just as UPI facilitates transactions between payers and receivers, these platforms link borrowers with lenders. After registering themselves borrowers can request for loan amount. Funding can be done in two ways- manual and auto. In manual lending, the lender selects borrowers whom they want to lend based on demographic and financial information updated on the platform. Whereas in auto-lending setup, the platform is responsible for deploying the funds based on lender preferences and its own set of rules.

P2P lending started in 2005 when Zopa introduced it first in the UK, sparking a new financial trend. The model quickly caught on in the US with platforms like Prosper and LendingClub. The 2008 financial crisis shook confidence in traditional banks, paving the way for P2P platforms as a more trusted alternative for loans and lending.

Yes, P2P lending in India is regulated by the Reserve Bank of India (RBI), which oversees these platforms as P2P Non-Banking Financial Companies (NBFCs). RBI laid down detailed regulations for the operation of P2P NBFCs in 2017 and continues to monitor them. Only companies that have received CoR for P2P NBFC can operate P2P lending in India.

Anyone over 18 with an Indian or NRO bank account can lend in P2P lending. The aggregate exposure of a lender to all borrowers at any point of time, across all P2P platforms, shall be subject to a cap of ₹50,00,000/- provided that such investments of the lenders on P2P platforms are consistent with their net-worth. The lender investing more than ₹10,00,000 across P2P platforms shall produce a certificate to P2P platforms from a practising Chartered Accountant certifying minimum net-worth of ₹50,00,000 The exposure of a single lender to the same borrower, across all P2Ps, shall not exceed ₹50,000/-.

Indian citizens over 18 with valid KYC documents can apply for a loan on P2P lending platforms. The total borrowing limit across all platforms is capped at Rs. 10 lakh at any given time.

Interest rates on P2P loans are intricately tied to the borrower's creditworthiness. Factors such as their credit profile, existing financial commitments, the duration of the loan, and prevailing market conditions collectively influence the interest rate assigned to the loan. Typically, borrowers with robust credit histories and lower perceived risk levels are eligible for more favourable, lower interest rates.

If a borrower fails to repay their loan, P2P lending platforms take proactive measures to facilitate loan recovery. This includes implementing a structured collection process, which involves issuing reminders, imposing late fees, and reporting defaulters to credit bureaus to safeguard the lender's interests. In more severe cases, the platform may resort to legal action and engage recovery agents on behalf of the lender.

However, it's crucial to note that in the unfortunate event of a default, the lender bears the brunt of the financial loss. Despite the platform's efforts to mitigate risks, the responsibility for any incurred losses ultimately falls upon the lender.

Participating in peer-to-peer (P2P) lending offers several distinct advantages. Firstly, it shields lenders from market volatility, providing a stable addition to their investment portfolio and enhancing diversification. Moreover, the potential returns typically surpass those of traditional investments like fixed deposits and bonds, making it an attractive option for those seeking higher yields.

P2P lending also presents an opportunity for lenders to engage in socially impactful ventures, aligning their lending with causes they care about. Additionally, its flexible nature allows for short-term investment strategies, catering to varying financial goals and timelines.

For borrowers, P2P lending bridges the gap, reaching segments of the population often underserved by conventional lending institutions. Its seamless digital process and borrower-friendly terms have democratized access to credit, empowering countless individuals and small businesses to fulfill their financial needs swiftly and efficiently.

Lending through in P2P lending is not insured like bank deposits. While platforms usually have risk mitigation measures, they do not guarantee returns or protect against losses. Hence lenders must look at all possible scenarios before lending.

Interest income from P2P lending is taxed under "Income from Other Sources" according to your tax slab, similar to interest from savings or fixed deposits.

RBI regulations require P2P NBFCs to have contingency plans and systems to protect lenders’ and borrowers' interests. Funds are held in the escrow account of the trustee bank to ensure continuity of operations. The agreement between lender and borrower remains valid even if the platform shuts in any circumstance.