PEER TO PEER LENDING (Syllabus: GS Paper 3 – Economy)

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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.


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