As per the recent report by RBI, P2P lending has shown accelerated growth over the last one year. While this is encouraging innovations, the regularoty body is not oblivious to the risks posed by such institutions to the system. A Concept Note, hence is expected onP2P lending on the Reserve Bank’s website for public comments by April 30, 2016 and based on the feedback, the contours of regulating P2P lending will be decided in consultation with the Sebi. Therefore, it is the right time to understand P2P and discuss it in detail. Here is everything you need to know about P2P lending and the new RBI regulations for the same.
What is P2P lending P2P lending is the best example of the alliance between technology and finance. If you are looking for a personal loan or funds for a new project, but do not have enough credentials to seek a bank loan, you can opt for P2P lending, which is now emerging as a popular form of alternate lending.
As defined by RBI, P2P lending, also referred to as social investing, marketplace lending or direct consumer lending is the practice of borrowing and lending of money among unrelated individuals and business entities on online platforms without any role for a traditional financial intermediary like a bank or a non-banking financial institution.
It is a concept where you borrow funds from multiple smaller lenders instead of one central lender like a bank or NBFC. If you need funds for any project or for any purpose, you can register yourself as a borrower and announce the details of your project or purpose and the amount needed on an online P2P platform. The interested lenders who have registered on the site will check your project and details and may come forward to invest in it if they are finding it feasible and profitable. The P2P platform takes a commission fee from both lenders and borrowers, for being a facilitator.
It will be wrong to say that this concept is new in India. It has been practiced for centuries. Even today, most individuals depend on their friends and relatives for short term money requirement.
The platform just formalised the entire process of taking loans from friends, relatives, and unknown individuals, and since it is online, technology made it simpler to get quick results. Peer to peer or P2P lending is just taking off in India and is still in a nascent stage.
Advantages of P2P lending P2P platform allows people to raise funds for all kinds of activities and not limited to personal loans or business loans. Apart from this, P2P loans give borrowers’ access to financing, which they might not have got from banks. In P2P lending, you are not required to offer any collateral security for the loan, making it easier to avail loan for your project.
Anyone, who has a legitimate need for money, can request for a loan on a P2P platform.
The platform will check your credit worthiness and if it finds you eligible, then it will allow you to list your loan requirements. You can get both personal loans and commercial loans for various projects with P2P lending platforms.
On an average, you may get personal loans between Rs 25,000 to Rs 5 lakh. You can raise commercial loans of up to Rs 30 lakhs through P2P platforms. P2P lending is carried out through websites of P2P lending companies, using different lending platforms, which charge a relatively small commission for their services.
P2P lending companies, apart from finding potential lenders and borrowers, also provide support services such as verification of identity and financial details of the borrowers, credit models for pricing of loans and customer service to borrowers. P2P lending is catching up with traditional banking both in Europe and the United States.
With the retail business model seeming to be firmly entrenched, P2P lenders are now allowing institutional investors, private equity firms and even traditional banks to lend through them.
Indications are that investors can earn much better returns by buying the safest loans from some of the P2P platforms and now there are discussions about developing secondary markets for such loans and their securitised products.
Are P2P loans safe While these platforms are still new to India and the scale of transactions is insignificant, this is a gap which requires regulatory attention. Amid all its advantages, P2P loans will need a lot of regulatory and technology support to make it as safe as bank loans or other traditional methods of fund raising. If not, a borrower can enlist on multiple P2P platforms and avail loans without getting tracked, leaving lenders vulnerable in repayment default. As there are no regulations in place for P2P lending at present, borrowers may also face difficulties in case of even small unintentional defaults. All these can put a pressure on the existence and performance of the P2P platform as well.
P2P lending and regulatory mechanisms To make P2P lending safe and part of mainstream lending in India, Reserve Bank of India (RBI) is in working in collaboration with market regulator Sebi to regulate P2P lending. Few years back, Sebi had proposed a framework to encourage and streamline P2P lending in India.
The proposed framework provides for security-based crowd funding in India under three routes — equity, debt and fund.
The proposal intends to develop an additional channel for entrepreneurs to raise early stage funding and seeks to balance the same with adequate investor protection measures.
RBI Governor Raghuram Rajan has announced that the central bank is working on a concept note on P2P lending, which will be ready by April 30, 2016. Once the note is ready, it will be made public on the official website of RBI and will be open for public feedback and comments.
Based on the feedback it gets, RBI will draft a final regulatory mechanism to monitor and streamline the peer to peer lending in India. Once the P2P lending is streamlined and risks for such alternate lending are covered, there is a likelihood of an increase in popularity for P2P loans. Once the risks are covered for the lender, borrower and norms fixed for P2P platforms, the peer to peer lending sector can unlock its full potential as a popular alternate lending system, which is helpful for the common man who seek finance.
(The writer is the CEO of BankBazaar.com)
