Peer- to- Peer lending

• The Reserve Bank of India ( RBI) has come out with a discussion paper to regulate the fast- growing crowd- funding and peer- to- peer ( P2P) lending space.
• This space has been gaining momentum with about 30 players in this space and, therefore, the central bank believes it is important to regulate the space.
• RBI’s discussion paper has said that the platforms should adopt a company structure that can then be regulated by the central bank and it can be treated as an intermediary NBFC.
• Currently, P2P platforms are run by individuals, proprietorship, partnership or limited liability partnerships —areas outside RBI’s jurisdiction. The discussion paper also suggested that there should be a minimum capital of 2 crore rupees. The discussion paper also sought to curtail the freedom of these companies significantly and said funds raised through the platforms should go directly from the lender’s bank account to the borrower’s.

What is peer- to- peer lending

• P2P lending allows an individual to lend/ borrow money to/ from other unrelated individuals without assistance from any financial intermediary. This is mainly done via the online platform that connects lenders with borrowers
• Borrowers who may not be able to access loans form banks/ NBFCs can log on to these platform to get loans. So, people can tap into these avenues if you don’t have a good credit history or are a first- time borrower. Also, for loans of small ticket sizes, consumers end up tapping this medium as banks might not be very forthcoming in sanctioning small amount loans because of the cost incurred. The rates can vary between zero per cent and 36 per cent and the tenure can be between three months and three years. The maximum loan that one can avail via this channel is rupees 5 lakh.

Analysis:

• Although nascent in India and not significant in value yet, the potential benefits that P2P lending promises to various stakeholders and its associated risks to the financial system are too important to be ignored. Coming under the purview of the RBI will not only be a confidence booster for the sector, but also for individual lenders.
• According to the data released by Peer to Peer Finance Association, the cumulative lending through P2P platforms globally, at the end of Q4 of 2015, had reached 4.4 billion pounds. In India, P2P lending platforms are largely technology companies registered under the Companies Act
• People who may not be eligible to get loans from banks/ non- banking financial companies ( NBFCs) can take loans. It can also allow customers to become lenders and earn interest.
• But this has risks also. Interest rates are higher than what a bank/ NBFC may charge. Currently, it is not regulated so consumers can not approach any ombudsman in case of distress. Also, beyond the companies there are no grievance redressal systems in place.

By: Vishal