Sidhartha Shuklamoneycontrol.com The Reserve Bank of India has kicked off efforts to regulate peer-to-peer (P2P) lending in India. The move is believed to help the funding gap in the market which banks haven’t been able to service sufficiently well. The banking regulator has invited comments on its proposal to have P2P websites registered as non-banking finance companies. So, what does P2P really mean for borrowers, and lenders? Here is a primer.
What is Peer-To-Peer (P2P) lending?
Peer-to-peer lending is a form of crowd-funding where an online web-based platform brings individual borrowers and lenders together to raise or lend unsecured loans without a middle man.
What is crowd-funding?
Crowd-funding refers to a process of funding a venture or a project through small amounts of money raised from a large number of individuals, usually through a portal acting as an intermediary.
How are interest rates decided in a P2P model?
The interest rate may be set by the online platform or by a mutual agreement between the borrower and the lender.
How do P2P online platforms profit from this model?
The platform providing this service gets a fee from both the lender as well as the borrower. The borrowers pay an origination fee according to their risk category. The lenders, depending on terms of the platform, have to pay an administration fee and an additional fee if they choose to use additional services like legal advice, credit assessment, cheque collection and recovery etc, which the platform may provide.
How is P2P different from traditional banks?
P2P lenders have much lower cost structures than traditional banks as they don’t need to have a physical branch or regional offices.
Borrowing a loan via P2P is easier and less time-consuming.
What are the downsides of such a model?
It is easier for criminals to defraud an online lender by submitting loan applications with fake identities.
Which countries have a regulatory framework for P2P lending model?
France, Germany, Italy and United States of America have banking regulations while Australia, Argentina, Canada (Ontario), New Zealand and United Kingdom have intermediary regulation.
In Israel and Japan, P2P lending is banned under legislation.
What is the state of P2P lending in India?
There is no credible data available regarding the total lending through P2P platforms in India. However, there are around 30 start-up P2P lending companies in India.
Lendbox, Faircent, i-lend, i2ifunding are a few P2P lending companies in India.
Should there be regulation of the P2P lending business?
YES
-P2P industry has the potential to disrupt the financial sector and throw surprises. And so a framework is needed.
-There is the risk of unhealthy practices being adopted by one or more players, if P2P lending is left unregulated.
-P2P lending promotes alternative forms of finance, where traditional finance can't reach.
NO
-This model could attract lenders who may not understand the risks involved. They might end up lending to high-risk borrowers.
-Regulations may also be seen as too stringent and they could stifle the growth of an innovative avenue for borrowers.
What has been the global experience towards P2P lending?
According to data released by P2P Finance Association, the cumulative lending through this platform globally, at the end of Q4 of 2015, has reached 4.4 billion GBP. Lending through P2P has grown dramatically from 2.2 million GBP in 2012 to 4.4 billion GBP in 2015. (Graph courtesy RBI)
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