The Peer-to-Peer or P2P Lending and Borrowing ecosystem is now one of India’s emerging sectors and is growing rapidly with more players joining in. So, what is this P2P ecosystem, which is generating a lot of interest?
It is a virtual ecosystem, that facilitates to connect retail borrowers with lenders (common people) who are willing to invest their surplus fund. P2P is totally free from the purview of banks or financial institutes and also known as crowdlending or social lending.
History of P2P Lending
The history of P2P dates back to the early 2000’s financial crisis and since then, its popularity has risen across the world with China leading the space. The first P2P platform was Zopa, founded in 2004 and is based in the UK. The practice of P2P lending is not something new or revolutionary, but the practice is centuries old and was more informal in nature.
In India, the P2P lending ecosystem is in existence since 2014, but it received a jump-start in September 2017, when RBI recognized the sector as NBFC-P2Ps and a month later, regulatory guidelines were issued. As of Jan 2019, India has a total of 11 P2P lending platforms registered with the central bank.
Faircent, i2iFunding, Monexo, Lenden are some of the P2P service providers in India.
How does P2P Lending Works?
In the P2P ecosystem, the platform acts as an intermediary, which supports both the lender and the borrower. The platform does the profiling of the borrower, from measuring creditworthiness, risk analysis to verification of documents before getting them registered.
On successful completion of the borrower’s profile, the P2P platform further connects the borrower with the lender. On showing satisfaction to the borrower’s profile, the lender lends the money at an agreed interest rate of up to 30 per cent and payback terms. The interest rate factor depends on the credit risk profile of the borrower. One important point is, all the loans are unsecured in nature or is not securitized.
In return, the P2P platform pockets a certain percentage of commission income from both the borrower and the lender.
Here, all the process, from registration to lending of the loan amount to borrower are done online and in a transparent method. There is no requirement for lender and borrowers to meets personally.
Scope of P2P Lending in India
For P2P platforms, India is a huge untapped market and has the potential to become a $5 billion market by 2023.
Currently, a very small amount of credit disbursed by the banks and financial institutes reach the micro and small-sized enterprises (SMEs). The reason for this is because most of the borrowers fail to meet the stringent rules and regulations imposed by banks. According to Fintech Trends India Report 2018 by PWC, over 50 million MSMEs in India has an unfulfilled credit demand of $198 billion.
P2P lending platform facilitates borrowers with no credit score and less financial data to raise loans amount without hassle for a period of 1-3 years. With the government now focusing more growth in Tier 2, 3 & below cities and towns, where banking facility is limited, the P2P ecosystem can witness explosive growth.
Surely, the P2P lending business is gaining traction in India and favourable regulation by RBI has given much-needed credibility to the sector. Going by the scope, there exists a huge opportunity to scale the model and reach those who are failing to take benefits of the banking facilities. Currently, the sector needs to attract more investment in technology to efficiently scale the heights and success.
Just like the scope of P2P ecosystem, its stakeholders both borrowers and investor can reap huge dividend but also carries risks, which I have discussed in detail in my next blog.