What Is Peer-to-Peer (P2P) Lending?
What is P2P?
Peer to Peer (P2P)Lending is a new alternate Debt Asset Class for Investors. It is the practice of lending money by one person to another person through an online portal for a pre-defined Purpose, Period, and Interest Rate.
P2P is a short-term Debt Instrument that provides superior returns to Fixed Deposits, Liquid Mutual Funds, and Debt Mutual Funds coupled with lower risk.
What is the history of P2P?
P2P emerged as a concept in UK in 2005.
Currently it is regulated and operational in 30+ countries including UK & USA.
In existence in India since 2012. Regulated by RBI since 2017.
According to a Morgan Stanley Report, the Global P2P market will be 490bn USD by 2020.
In India, the P2P market size is estimated at 10bn USD by 2025.
How does P2P work in India?
All P2P portals are registered with RBI as a P2P-NBFC.
All P2P portals are online aggregators only – they cannot lend, borrow, or control money.
All moneys flow directly from Investor to Borrow and vice versa through an Escrow Account managed by a Scheduled Bank Trustee independently.
P2P portals do the following:
- List Lenders after online verification process
- List Borrowers online after detailed check which involves KYC verification, Personal verification, CIBIL check, Financial verification, Social Media verification, etc covering more than 100 data points
- List Borrowers demographic profile, risk category (and applicable interest rate), purpose,& period of loan
- Provide discretion to the Lender to either choose Borrowers or lend through and Algorithm.
- Provide monthly factsheets containing details of borrowings, earnings, and defaults by risk category; and report delays and defaults to CIBIL periodically.
- Initiate recovery proceedings from Borrowers in case of delays and defaults.
- Provide Investor support.
Why has P2P emerged as a new Asset Class?
P2P addresses an obvious demand gap in the Debt Market which Banks and NBFC’s do not:
- Lower TAT – complete online process
- Suitable for small borrowings
- Larger underserved Borrower class like new Salaried earners without credit history
- Adequate Capital availability since no regulatory requirement for maintaining Cash Reserve Ratio (CRR) – Entire Lender amount is extended to Borrowers.
- Unlike banks there is no “spread of Interest” resulting in lower costs for borrowers and higher earnings for Lenders
- Avoids risk concentration by dividing Lending amount in micro sums over Borrowers
- Power of Compounding for Lenders
- Monthly Returns [if opted for by Lender]
What are the key P2P regulations and benefits?
RBI has ensured stability, safety, and growth of the P2P segment by:
- Restricting loan period to a minimum of 3 months to a maximum of 36 months
- Restricting a lender to 50 lakhs of exposure across P2P platforms
- Restricting a borrower to a maximum loan of 10 lakhs across P2P platforms
- Restricting a lender’s exposure to a single borrower to a maximum of 50,000/-
Existing P2P platforms have further de-risked the P2P model by:
- Employing in-depth Credit checks
- Deploying Algorithms that ensures that the lender’s exposure is as low as 500 to 1000 to a borrower
Who should invest in P2P?
Persons who are:
- Already invested in Debt Instruments &/or Equity/ Mutual Fund, and are seeking diversification for a higher return at a lower risk,
- Seeking predictive returns
- Willing to stay invested for 36 months [though minimum Investment horizon is 3 months] to benefit from the power of compounding
Individual (including NRI through NRO account), HUF, Firm, LLP, Companies can invest in P2P.
What is the future of P2P in India?
P2P will:
- Grow exponentially with awareness
- Emerge as a prominent asset class
- Become safer as risk mitigation Algorithms improve
- Become an asset classes that fine tunes the dichotomy of risk and returns