PEER TO PEER LENDING (Syllabus: GS Paper 3 – Economy)
Context: MSMEs have appealed to the RBI to establish a regulatory framework for peer lending and crowdfunding to address credit gaps, according to the central bank.
Peer to Peer Lending
- About: It is a form of crowdfunding facilitated through an online platform that matches lenders with borrowers for unsecured loans.
o Also known as "social lending" or "crowd lending“.
- Participants: Borrowers can be individuals or businesses needing a loan.
- Safety: It is riskier than a savings account or certificate of deposit, but the interest rates are much higher.
- Regulation of P2P Lending Platforms
o Regulatory Body: These platforms are regulated by the Reserve Bank of India (RBI) and categorized as NBFC-P2P.
o Restrictions: Platforms must not engage in direct financial activities of lending money.
- Benefits of P2P Lending
o P2P lending companies operate online with lower overhead, making their services cheaper than traditional financial institutions.
o Lenders can earn higher returns compared to savings and investment products offered by banks.
o Borrowers benefit from lower interest rates even after platform fees.
Market Dynamics in India
- Market Entry: In 2016, around 30 P2P lending platforms existed in India, with varying success due to investor caution and lack of awareness.
- Market Impact: P2P lending platforms support borrowers who have been rejected or failed to qualify for bank loans.
