P2P Lending – Emerging Trend In The Banking Domain – Niteen From IIM Calcutta
Peer-to-peer lending (P2P lending) is the practice of lending money to individuals or businesses through online services that match lenders directly with borrowers. Since peer-to-peer lending companies operate online, they can run with lower costs and provide the service more cheaply than traditional financial institutions. As a result, lenders often earn higher returns compared to savings and investment products offered by banks, while borrowers can borrow money at lower interest rates. Currently, P2P online players are registered under the Companies Act and are largely unregulated. The people behind these fintech startups are either technocrats or young entrepreneurs. Unlike banks that have savings and credit history of borrowers P2P players largely depend on credit bureaus for assessing the credit worthiness of borrowers. But, not all borrowers are part of credit bureaus in India. Moreover, P2P lending runs the risk of fraud such as money laundering, cyber theft, data theft, ponzi schemes.
P2P lending It has been prevalent since 8 years in the US and has a prominent market in USA, UK and China. It has begun in India since past 2-3 years.
There are mainly 5 types :
- P2P consumer lending
- P2P SME lending
- P2P Real Estate lending
- P2P consumer balance sheet lending
- P2P SME balance sheet lending
In balance sheet lending, the P2P company takes legal authority and basically is borrowing from lenders and loaning to borrowers. The loan transaction is reflected in their balance sheet.
P2P platform evaluates the credit score of borrowers based on not just past credit performance, but also individual entities future. The credit grading is usually on a 7 point scale. Interest for a loan request is fixed based on the borrower’s credit score. There most probably might be securitization of these assets. Few countries have certain restrictions to avoid P2P lending burst, like setting up a separate emergency fund, investing part of fees in insurance etc.
Furthermore, P2P companies have their own credit rating computing mechanism. Since borrower takes a loan for personal use, he/she is free to use it for any means, including lending on P2P platform. This is like creating CDS tranches all over again. Most of the P2P lending companies are unlisted, except three – one each in US, UK and China. Quite a few banks have strategic partnership with few P2P platforms. Another interesting thing in P2P lending is that borrowers have no strict obligation to disclose the purpose of the loan being taken.
US : Current market size is around 6Bn Dollars. Around 75% of loans is consumer lending and rest Industry lending. Its long run growth averages to around 200%.
Europe : P2P lending companies are treated as banks, and come fully under the ambit of the regulations. It has a relatively mature market with market size touching 3Bn Euros (growing at around 120%).
UK : This has a 50-50 share of lending to personal consumer lending and corporate lending.
China : It has a 75-25 market distribution of loans to personal and SME. Off late, this sector is being regulated strongly due to certain scams that emerged.
India : RBI has recently released a guideline that mandates these companies operating in India to take NBFC certificate. Hence minimum capital is the requirement.