Over the last decade, the finance sector has witnessed significant transformations, marking a sustained period of evolution. A focal point of opportunity, Peer-to-Peer (P2P) lending has risen, establishing direct connections between borrowers and lenders. This phenomenon has captured the keen interest of analysts, investors, customers, businesses, and regulators on a considerable scale. Peer-to-peer (P2P) lending, a burgeoning business model, is not only gaining momentum globally but is also finding a firm foothold in the Indian financial scene.
P2P Lending: A Closer Look:
P2P lending in India operates through online platforms, serving as a bridge between individuals or businesses in need of funds and investors looking for promising opportunities. These platforms streamline the lending process by cutting out traditional financial intermediaries. As borrowers apply for loans, detailing the purpose and providing financial background information, P2P platforms assess creditworthiness through a blend of traditional credit scoring and alternative data.
As a loan reaches its funding threshold, the P2P platform disburses funds to the borrower. Borrowers agree to the terms, including interest rates and repayment schedules. The subsequent repayment phase sees borrowers making regular installments, with interest payments benefiting the lenders. P2P platforms play an essential role in overseeing the repayment process, ensuring smooth transactions, and implementing risk management strategies to protect investors’ interests.
Highlighting the democratic nature of P2P lending Alok Kumar Agarwal Alankit states “One of its distinctive features is its inclusivity, enabling even modest investors to actively participate. Small and Medium Enterprises (SMEs) encounter challenges in securing financial support from traditional banks. Without expanded financing avenues, the survival of these SMEs, given their modest scale, may become precarious. SMEs are likely to turn to P2P lending FinTechs.”
Even Investors, seeking diversification, find P2P lending attractive as it allows them to distribute investments across various loans, minimizing the impact of potential defaults. The streamlined efficiency and speed of P2P lending redefine the borrowing experience, providing quicker access to funds compared to traditional banking processes. Competitive interest rates foster a mutually beneficial environment for borrowers, and transparency ensures that both parties have access to clear information about the lending process and loan performance.
A recent report from PwC forecasts that P2P lending in India is poised to reach USD 4 billion by 2026. This projection, though significant, pales in comparison to the existing scale of P2P lending in China, which currently exceeds a noteworthy USD 100 billion. Keeping in mind these numbers, Alok Kumar Agarwal Alankit holds a positive outlook for the future of P2P lending and recognizes the advantages inherent in P2P lending, contributing to its growing popularity in India.
However, like any other financial tool, P2P has its drawbacks as well. These include the risk of borrower default, potential fraud, or unethical practices due to the lack of heavy regulation, limitations on borrowing capacity imposed by platforms, and reduced liquidity compared to traditional investments, as lenders may need to wait until the end of the loan term to withdraw funds.
Recognizing the emergence of P2P lending platforms, it’s crucial to note that the RBI oversees P2P activities with an established regulatory framework governing the operations of financial intermediation businesses. Only NBFCs with explicit RBI permission can register as P2P lenders. All P2P entities, including non-NBFCs, need to register with the Department of Non-Banking Regulation. P2P lenders require RBI approval and must maintain a net-owned fund of at least Rs 20 million, with a capped leverage ratio of 2. Conditions for P2P lending platform registration include adequate technological and managerial resources, incorporation in India, and a Certificate of Registration. Once fulfilled, the RBI grants a 12-month in-principle approval and upon platform establishment, issues a CoR certificate as an NBFC-P2P. Some of the popular apps involved in P2P lending include CRED, Jupiter, BharatPe, Lendingkart, LiquiLoans, and others.
Alok Kumar Agarwal Alankit believes that even though P2P in India is in a nascent phase, there is a possibility of breakout. A substantial portion of the currently underserved market will find financial inclusion through P2P lending platforms.
He foresees a notable shift in consumer behavior, particularly among those currently relying on traditional banks. The efficient P2P loan application processes, reminiscent of successful models in the US and UK, may attract individuals seeking streamlined financial solutions. This migration to P2P lending platforms could signify a paradigm shift in how people access and fulfill their financial needs.
P2P platforms are proactively introducing additional checks and processes to manage Non-Performing Assets (NPAs), ensuring the sustained success and credibility of the P2P lending ecosystem.
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