By Rishab Maloo
Pursuing B.Com (Hons) at St.Xavier’s College,
What is 'Peer-To-Peer Lending (P2P)'
Peer-to-peer lending (P2P) is a platform of debt financing that enables
individuals to borrow and lend money - without the use of an official
financial institution as an intermediary. Peer-to-peer lending removes
the middleman from the process, but it also involves more time, effort and
risk than the general brick-and-mortar lending scenarios.
On these social lending networks, borrowers benefit by securing
loans at a lower interest rates compared to banks. On most of these
sites, borrowers’ personal information is also not disclosed. Lenders
can only see the credit profile of the borrower. The credit profile can
include things such as home ownership, monthly/yearly income,
total credit lines, credit balance, business details, debt to income
Lenders also benefit from these sites as they get a good return
on their investment which increases with the risk associated with
the loan. A good strategy is to fund multiple high risk loans with
small amounts thus diversifying the associated risk
Intermediated by the platform in the following way:
• The borrowers raise a requisition on the platform for funding
• Platform then evaluates the credentials of the borrower and assigns a
credit score, grades the borrower for determining the interest rates
chargeable to the borrower.
• Once the borrower’s application is approved, the application is made
open for the lenders to express interest in lending to the borrower.
• Once lenders’ commitment is received against the loan amount requested
by the borrower, platform approaches the bank empanelled with the
platform to disburse the amount to the borrower.
• Thereafter, platform acquires the loan from the originating bank from the
proceeds received from the lenders.
• The lenders are issued tradable notes/ certificates representing the
exposure of the lender against the borrower.
• Crowdfunding is a great option for start-ups and early
stage businesses. One needs to “pitch” the idea or business
to potential investors, and if interested, they will contribute a
sum to the proposed venture. The return can be in the form
of interest or through equity.
• Crowdfunding in its earliest form focussed on helping
entrepreneurial and pushing them in the market through
required funding. Though the project could be risky, if
successful can provide huge return. It is early stage
• Crowdfunding platforms will typically want a business with
a business plan and financial forecasts from you when you
make your application, so it’s important you get these in
Crowdfunding and peer-to-peer lending
At an initial stage when the idea is taking shape of a business model
and funding is required, then go for crowd funding. But, if the
business is well established and looking for a business loan,
then it is better suited to one of the peer-to-peer lending
For crowdfunders, returns are generally provided through giving a
share in the business or equity. Whereas, peer to peer lenders
are paid interest just like any other debt.
Peer-to-peer Lending Crowd Funding
How does the platform earn?
The platform earns by way of:
• i. transaction fees at the time of origination of loans;
• ii. earns servicing fees for servicing the loans on an on-going basis; and
• iii. earns management fees for managing the borrower accounts.
• The transaction fees is payable by the bank to the platform. The servicing
fees and management fees is paid by the lenders and the borrowers
respectively on the platform.
The transaction fee ranges from 1% to 6% of the initial principal amount of a
loan. The servicing fee compensates for the costs that the company incurs in
servicing the related loan, including managing payments from borrowers,
payments to investors and maintaining investor’s account portfolios and may be
around 1% of the amount received from the borrowers
Risks factors critical to any P2P
Some of the risks factors critical to any P2P platform are as below:
• No peers or history available to rely on. Considering the fact that
P2P is an innovation and by product of technological advancements, there
are no precedents to learn from or rely upon for doing business. Lending
Club and the peers are setting up business models to be emulated by the
subsequent entrants in the market.
• The larger the number of borrowers and lenders on platform, the larger is
the success of the platform. Hence, the success of the platform is
dependent on number of borrowers and lenders using the platform.
• For platforms following the Lending Club model, empanelment with
banks and appropriate documentation will be a constant challenge
and risk for the platform.
• Data privacy is of utmost significance. The information provided by the
borrowers and the lenders needs to be well protected by the platform.
• Simplicity of the product offering and regular functioning of the platform
are also risks that the platform needs to tackle.
P2P Lending India: Regulatory complexity and
lack of clarity
Regulatory complexity and lack of clarity on P2P model has acted as a
major deterrent in India when it is growing fast worldwide
While the entire world is enjoying a boom in peer-to-peer (P2P) funding, in
India this type P2P lending is still not prevalent and has no recognition at
all. Even more, there are no regulations governing P2P lending. While the
common laws of the country are largely based on the UK laws and are
largely facilitating and broad based in nature, the regulatory complexity
and non-clarity on P2P model has acted as a major deterrent in venturing
into the region. There is ambiguity on whether P2P would be seen as crowd
funding model or will be seen as a collective investment scheme. SEBI has
a draft on crowd funding but there is still a long way to go before the same
is finalised and implemented. Lack of understanding on the regulatory
side is one of the primary causes that P2P has not taken off in India.
Data Analysis & Market Growth
. Between 2014 and 2015 the value of global P2P
lending was expected to rise to a value seven
times what it was in 2014 – from 9 billion to 64
billion U.S. dollars. By 2050 the value is
expected to be close to one trillion U.S. Dollars.
1m loans between them and are generating more
at the rate of well over $10 billion a year.