While we know a lot about lending, P2P lending is fairly a new concept for us which got a little attention quite recently when RBI notified, that peer-to-peer lenders (P2P) companies will be treated as non-banking financial companies (NBFCs).
What is P2P Lending
To put simply Peer-to-peer lending is a new method of debt financing: connect those who need money with the ones willing to invest without involving a financial institution.
Need for P2P
- Faster, Cheaper & Convenient: Harnessing technology and big data, P2P online platform to connect borrowers to investors, avoids cumbersome and rigid procedures employed by traditional banks
- Huge unserved market: Caters to small ticket transactions (like repay bank debt, money for emergencies, holiday or even buying an iphone) of middle- to lower middle-class borrowers who find it tough to get loans from bank or NBFC or to small businesses, especially in the micro, small and medium enterprises space
- Formalize Informal lending: Informal lending at high interest rates has long existed in India but P2P can serve as a more transparent and legally enforceable alternative to the grey-market lending between friends, relatives and business partners
- New source of fixed income: In an environment when interest rates globally are low or zero, investment in P2P loans offers attractive yields ranging from12-30% for its investors with the associated risks.
The world’s first P2P lending platform, Zopa, was founded in the UK in 2005. The first in the US, Prosper, was founded in 2006, and the first in China, Paipaidai, was launched in 2007.
At present, it is partially or fully regulated in Australia, Argentina, Canada, China, New Zealand, United Kingdom, France, Germany, Italy and USA while it is banned in Israel and Japan. China has the largest and the most dynamic P2P market in the world, with hundreds of platforms offering diverse services with more than 4,000 providers.
A finding by Transparency Market Research suggests that “the opportunity in the global peer-to-peer market will be worth $897.85 billion by the year 2024, from $26.16 billion in 2015. The market is anticipated to rise at a whopping CAGR of 48.2% between 2016 and 2024.”
Some of the well-known marketplaces in the world are LendingClub, Zopa, Prosper, Upstart, Funding Circle, Rate Setter, Peerform, Pave, SoFi, and Auxmoney.
With more than 30 such platforms P2P lending market in India is nascent major players includes Faircent, i2ifunding, Lenden Club and Billion loans. A recent PwC paper estimates the market in India to reach $5 billion by 2020. Although the recent notification from RBI clears some doubt on regulation but the sector is still waiting for detailed guidelines from RBI which would give a lot more credibility to this structure for its growth in India.
Rs 16,200 crore is the outstanding personal loan book that bank and other financial institutions had as of 31 July 2017 compared to a figure not even crossing 100cr that the existing P2P players are doing shows that it is a no brainer that this sector has exponential growth potential.
What Can go Wrong / What has Gone Wrong
Lending Club of US was recently embroiled in a scandal surrounding founder Renaud Laplanche. He was forced to resign after it was told that a small amount of loans had been sold to one buyer — Jefferies, the investment bank — with doctored dates, and that he had an undisclosed interest in a fund in which he had urged Lending Club to invest. An internal probe also revealed that he and his family had taken out dozens of loans on the platform to boost volumes, just a few months before closing a funding round.
Ezubao, once China’s biggest P2P lending platform, folded last year after it turned out to be a Ponzi scheme that collected 59.8 billion yuan ($9.14 billion) from more than 900,000 investors through savvy marketing. They fabricated projects to raise money and then used fabricated project companies to re-circulate cash back into accounts linked to his companies.
These two and many other scandals majorly involving Chinese platforms cast a deep shadow over the outlook for the P2P sector. Despite the concerns and recent abnormalities in the industry are not all bad for the industry in the long run. Stronger regulations and effective oversight will lead to industry consolidation and in the end stronger and stable players would survive.
Should we borrow/invest?
P2P lending in the Indian context would first require detailed guidelines from RBI to clear the looming doubts over the regulatory framework of this sector. Secondly before investing a lender should have full understanding of the due diligence process carried out by the platform before disbursement, acknowledging that one is funding an uncollateralized loan, recovery process, default rate on the platform & consequence on default where the investor bears all the risk and incurs any legal charges involved. This will enable a lender to evaluate inherent risk in a lending he is about to make.
A well-regulated and transparent P2P platform may offer great opportunities as a medium risk alternative investment for loan providers by diversifying lending to various borrowers at different interest rates , as well as for borrowers in retail and small businesses category this can prove to be a faster and convenient way of raising debt.
All said and done, don’t forget to take advice of your financial planner before lending or borrowing on this medium.