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P2P LENDING: GLOBAL AND INDIAN SCENARIO

The world saw the effects of the 2008 financial crisis, where banks began to impose stricter laws against consumer lending. Quick and simple loans became tough to acquire. Even those with a good credit history found it challenging to acquire loans. As the loan approval processes became longer and the criteria for credit assessment tighter, it opened the door to alternative financing, bringing about the rise of the peer-to-peer (P2P) lending space.
P2P lending these days has a huge focus on technology, utilizing online platforms to connect borrowers and investors. By incorporating the use of technology into finance, credit approvals and loan processes have been made quicker and more efficient. With that, P2P lending has seen a steady growth globally and has been recognized as one of the fastest growing areas in alternative financing. How long will this growth continue?
The Growth of P2P Lending
Since its concept originated back in 2005 with Zopa in the UK, P2P lending has grown at an astonishing pace. In 2016 alone, P2P lending generated more than $200 billion worth of investments worldwide. The concept helps the under-served or under-banked individuals and businesses access alternate sources of financing, connecting individuals which have a surplus of cash to business owners who are looking for loans. These loans are then packaged in the form of investments for these individuals to fund.
What was previously considered as simply a form of alternative finance has begun entering the mainstream. Despite the fact that the P2P lending industry has yet to fully mature, it has shown great promise and potential for growth in the future.
Thus far, the industry has been progressing consistently. As default rates stabilize, and recognition increases, the P2P market is seen to continue its steady growth.
Global Recognition and Projections
Globally, the P2P lending market has started to become recognized for its potential and growth. While the industry has yet to fully mature, it has already created high volumes of investment opportunities internationally. Possibly due to the inherent financing gaps and borrowers’ increased interest in seeking out alternative sources of financing.
The concept of P2P is viewed differently around the world. For instance, Canada and UK regulate P2P platforms as an intermediary, while in France and Germany, it is regarded as similar to banks. In the US, however, regulations vary from state to state. For China, having the largest P2P lending market globally, they have practically integrated P2P lending to become a staple in their financing scene.
Despite these differences, one thing in common for P2P lending worldwide is their growth projections. Transparency Market Research suggests that the opportunity in the global P2P market will be worth $897.85 billion by the year 2024, from $26.16 billion in 2015. It is also predicted to hit about 45% of the global share market by 2020.
Challenges For The Industry
As promising as the P2P lending market might seem right now, there are still several nooks and crannies that need to be worked out for this young industry to reach its fullest potential.
Fraudulent risks may dissuade investors from trusting their money with P2P lending platforms. Despite its popularity, P2P lending is still viewed as an alternative source of investment. Thus, investors might not be too willing to invest with such platforms. Statistics by the Chinese Banking Regulatory Commission showed that out of the 4,127 P2P lending platforms at the end of June 2016, 1,778 were suffering from problems such as Ponzi schemes. Therefore, investors should choose platforms that have safeguards in place against such risks. One example would be Funding Societies, who engage a third-party escrow agency to handle all funds from investors.
Loan default rates pose a huge threat to the market. The industry would have to work a way between regulating interest rates and the ability to make repayments. Ensuring that they continue to uphold a stringent credit assessment criteria and keep default rates as low as possible. For instance, Funding Societies, Southeast Asia’s ’s leading P2P lending platform, has the lowest default rate in its region at 1.3%.
Competition from banks and other financial institutions would limit the volume of loans that the industry has access to. Traditionally, business owners would look to acquire funds from banks rather than considering alternative solutions, like P2P lending. They might not even consider taking up a loan with P2P lending platforms, considering the comparably higher interest rates that comes attached to P2P loans. As a result, P2P lending platforms might lose out on a market share of borrowers. Although P2P lending currently targets businesses who are under-served and under-banked, there could potentially be a partnership in the long run between the two, working out how they can mutually support each other’s field of work.
All in all, while P2P lending is still fairly adolescent, it has shown great promise in its future. As with any market growth, there are risks. But as long as P2P platforms continue to safeguard themselves against such risks, and continue to innovate and improve, the future of P2P lending should continue to shine brightly.
Indian Scenario
The Reserve Bank of India (RBI), on October 4, issued directions for non-banking financial companies (NBFC) that operate peer-to-peer (P2P) lending platforms. According to the directions, from now on no NBFC can start or carry on the business of a P2P lending platform without obtaining a Certificate of Registration. Every company seeking registration with the bank as an NBFC-P2P shall have a net owned funds of not less than Rs 20 million or such higher amount as the bank may specify. 
There is good news for existing NBFC-P2Ps as well as because there are few players already in the market. They have been asked to apply for registration as NBFC-P2Ps within 3 months. 
These directions issued by RBI will be known as the Non-Banking Financial Company – Peer to Peer Lending Platform (Reserve Bank) Directions, 2017, and will come into force with immediate effect. 
P2P lending is a form of crowd-funding used to raise loans which are paid back with interest by bringing together people who need to borrow, from those who want to invest. It can be defined as the use of an online platform that matches lenders with borrowers to provide unsecured loans. The borrower can either be an individual or a legal person requiring a loan. The interest rate may be set by the platform or mutual agreement between the borrower and lender. 
Scope of Activities of NBFC-P2P 
Among several other things, an NBFC-P2P can: 
  • Act as an intermediary providing an online marketplace or platform to participants involved in P2P lending. 
  • Not raise deposits as defined by or under Section 45I(bb) of the Act or the Companies Act, 2013. 
  • Not lend on its own. 
  • Not hold, on its own balance sheet, funds received from lenders for lending, or funds received from borrowers for servicing loans; or such funds as stipulated in paragraph 9. 
  • Not cross-sell products except for loan-specific insurance products. 
  • Not permit international flow of funds. 

An NBFC-P2P Will Be Expected To: 
  • Undertake due diligence on the participants. 
  • Undertake credit assessment and risk profiling of the borrowers and disclose the same to their prospective lenders. 
  • Undertake documentation of loan agreements and other related documents. 
  • Provide assistance in disbursement and repayments of loan amount. 
  • Render services for recovery  of loans originated on the platform

Prudential Norms
  • The aggregate exposure of a lender to all borrowers at any point of time, across all P2Ps, shall be subject to a cap of Rs 10 lakhs. 
  • The aggregate loans taken by a borrower at any point of time, across all P2Ps, shall be subject to a cap of Rs 10 lakhs. 
  • The exposure of a single lender to the same borrower, across all P2Ps, shall not exceed Rs 50,000. 
  • The maturity of the loans shall not exceed 36 months

Fund Transfer Mechanism 
Fund transfer between participants on the P2P lending platform will happen through escrow account mechanisms. All fund transfers shall be through and from bank accounts, and cash transactions are strictly prohibited. Earlier, the RBI had issued a discussion paper on regulation of the P2P lending platform as a non-banking finance company (NBFC). Thereafter, the P2P platform has been notified as an NBFC under section 45I (f) (iii) of the Reserve Bank of India Act, 1934 as per the gazette notification published on September 18, 2017. 
Dev Raj Singh, executive director, tax and regulatory services, EY India, said, “The guidelines on borrowing and lending on P2P platform issued by RBI is a welcome step in a direction to bring the localized market of money lenders to a formal platform by making borrowing / lending through banking channels. In addition to the benefit of borrowers by giving easy access to credit, it will also benefit the small lenders by giving them an avenue to lend the surplus funds in a secured manner which will also benefit the small lenders by giving them an avenue to lend the surplus funds in a secured manner which will yield higher rate of return as compared to bank deposits. The guidelines also expressly permit the existing player to apply to RBI within 3 months for registration. The cap on the amount of borrowers / lenders, in single or in aggregate, would keep high net-worth individuals away from participating.” 

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