Time to boost P2P lending

Context: As the banks grapple with risk aversion and savers see an erosion in the value of money, the P2P platform can be a win-win for both borrowers and lenders

Peer-to-Peer (P2P) lending: The P2P business model entails collection of money from individuals and lending to individuals as well as micro and small enterprises.

RBI’s draft on P2P lending: RBI issued first draft on P2P lending in 2016 with following characteristics:

• “Fit and proper ” norms along with at least of Rs 2 crore net-owned funds.
• Collateral-free loans: Capped at Rs 50 lakh, also all defaults are reported to the credit bureaus to block the defaulter’s access to formal credit channels.
• Regulation: P2P lenders need to follow the normal disclosure norms, report every quarter and are subject to RBI audits.
• Working: After KYC norms are approved, crowd funding process starts for borrower. Use of escrow account for money transfer under third-party.
• Interest rates vary from 11 % to 18% depending on the profile of customers

Advantages of P2P:

• Ensuring Credit Flow:  Credit would not be dependent on the already burdened banks and small borrowers can easily find investments through small investors.
• Relief to saving individual: As the interest rates all the world are on a decline, it sounds beneficial to invest through P2P lending rather than keeping money in banks.
• Engaging Diaspora: RBI can introduce this scheme for NRI account holders to attract money from overseas with higher return.
• Enthusing High Net-worth individuals (HNI): Due to low interest rate, RBI can increase the lending limit and allow HNIs to enter the market.

Global experience:

• In 2005, first P2P lending company started and thereafter the business has expanded all over the world including USA, China ,New Zealand etc.
• UK attracted P2P market through provision of tax advantages.
• The escrow account mechanism in India has been taken from the U.K.

Way Forward: India must try to open different channel of investment in light of limited space. Giving tax incentives and allowing individual investors, both domestic and foreign, in India P2P lending forum would certainly reap benefits as it did elsewhere.