Ancient texts of Kautiyla’s Arthshastra dating back to 321 BC mentions a network of merchant bankers and financiers giving rise to the system of Lending in India.
Financial instruments like ‘Hundi’ followed it, and later a new phase made a kick start with the evolution of the banking system to organize and stabilize the informal Lending.
But now, let me ask you a question. Are you still using the antiquated system of the traditional mortgage industry, or looking only for acquaints to lend or borrow money?
If yes, then you need to reconsider your choices. Revolutions are the locomotives of history, and P2P Lending is an option worth considering.
Peer to peer lending or person to person lending enables individuals to obtain loans directly from other individuals, cutting out the financial institution as the middlemen. It is an easy way to connect with cash-flush individuals without the need for picture-perfect credit or reams of red tape and paperwork. Designated P2P online platforms are used for such Lending. Websites like Finzy, i2i Funding, and Lending Club that facilitate such Lending have significantly increased its adoption as an alternative method of financing.
The adoption of the digital landscape was evident with the 20 times higher transaction value in RTGS than the paper-clearing system; 23 % of the consumers availing retail loans digitally. The demonetization move in November 2016 underlined the impetus for the digital economy. Unified Payment Interface (UPI) arrived on the scene soon after and there from amidst the rising class of digital wallets, UPI, mPoS, one sector that is slowly and silently rearing its head is P2P Lending (peer-to-peer Lending).
Hence, P2P Lending is designed in such a way that paperwork has been whittled down significantly. It is easily accessible, more frequent and transparent. It has been successfully able to expand the reach by connecting the prospective lenders and borrowers by providing a lower rate of interest, new and convenient service.
Let me give you a brief on how these online market places work:
As a prospective lender, we need to create a profile with personal and bank information. We need to specify our interest concerning the criteria of borrowers; we wish to lend. We shall then wait for the loan requests from the borrowers.
As a borrower, on the other hand, we shall have to create an account with the personal and bank information. We can provide additional details like the existence of collateral, availability of a guarantor. We can then send loan requests to the lenders.
The loan is approved and serviced through the platform, or a lender can himself interview the borrower and either accept or reject the loan application. The process can be entirely automated, or lenders and borrowers can choose to haggle. The primary function of these platforms is to handle the money transfers and monthly payments. Most platforms have a wide range of interest rates based on the creditworthiness of the applicant. It hardly takes 5-7 minutes for any person registered on the platform to borrow or lend money.
However, a lender might have to pay a fixed fee say 1% of the loan to the platform or both the lender and the platform may share the loan’s earned interest. Few of the platforms specialize in particular types of borrowers, for example, Lending Club has a select category “Patient Solutions” where it links doctors who offer to finance with prospective patients.
But as it said, ‘Bad debt could rip a chunk out of a good story’. Hence, one of the most significant risks of P2P Lending is that your investment can turn out to be a dead duck.
Your money is insecure, and unlike mainstream banks, you have no guarantee of receiving it back. Besides as a borrower, we can take out a sizeable peer-to-peer loan without a deep dive into our financials or credit. But debt is a slavery of the free, and one can find themselves significantly exposed to it. The other significantrisk shall be the P2P platform wiping out of the market.
So to curb such risks, a person should not commit all to one boat, applicants may consider breaking up their requests into chunks and accept multiple offers to broaden and widen the lending/borrowing base to minimize the risks. One may also take essential steps to decide a P2P lending platform.
But these measures are not significant enough to clear the dark side of P2P Lending activities in the economy. An analysis by Cleveland Federal Reserve in 2017 says that the P2P Lending Platforms have begun resembling the subprime mortgage lending system which lead to the 2008 Financial Crisis. As the platforms expand their reach, the standards decrease, and the defaults increase.
The P2P Lending market in India is a nascent one and is also poised to grow into a 4-5 billion dollar industry by 2023.
While the origin of P2P Lending globally coincided with the financial crisis of the early 2000s. It all started from the United Kingdom where the world’s first P2P lending platform – ‘Zopa’ was established.
Even though the push for the industry was only from the year 2016, its origin certainly dates back to 2012 when the first P2P lending platform, i-Lend was established in India. The appeal of P2P Lending lies in its convenience and efficiency.
Hence, Reserve Bank of India in the year 2017, has come up with the following Master Directions for Peer to Peer Lending in India to regularize it:
Globally, peer-to-peer Lending forms more than 70% of all crowdfunding activities. In all the developed countries like USA, UK & Japan and the developing country China – the P2P market has reached a stage of growth. It has proved to be one of the most successful digital platforms.
In case of comparison of Indian guidelines for the functioning of the P2P platforms with that of the Chinese model, it was noted that China includes a concept of “Guarantor”, where a third party organization can guarantee risks undertaken by the lender. While in the case of Japan’s P2P lending platforms, the concept of a guarantor is prohibited. However, it permits the investors to lend in the form of equity after meeting with certain compliances. The UK allows the platforms to issue their own loans but the USA, in contrast, restricts the role of P2P platforms to intermediaries as similar to India.
Moreover, with the advent of technology, blockchain is all set to reconstruct the model of the peer-to-peer lending platform by bringing in more trust and transparency. Usage of blockchain technology for the P2P Lending creates smart contracts between the borrowers and the lenders. Smart contracts shall embed a crypto-wallet. It shall auto-generate the interest rates based on the risk profiles. It shall also enable auto-payments and enforce compliances.
Considering all of these, it can be said that P2P Lending is growing and has become far more mainstream as an excellent way to access easy loans & higher returns.
Of course, take your time to choose what’s right for you, but make sure before you borrow or lend, you consider the trend.
Sushma is an audit analyst and has been associated with KVA for over a year gaining incredible insights from her work revolving in the spheres of Risk Advisory, Assurance and international taxation. She is an Aesthete with an inquisitive mind, someone who sketches and plays the guitar and knows the importance of every stroke and every string
