With the rise in demand for capital, there is an equal rise in providing disruptive financial assets to the borrowers. Companies are exploring avenues beyond providing the traditional method of lending wherein, banks or any financial institutions provided loans to the borrowers. Banks levied interest charges on the borrowers and considerably lower interest rate was credited to the depositors.
Peer to Peer Lending is the emerging financial asset class wherein, lending activities take place through online platform. P2P lending in simple terms means direct lending and borrowing between lenders and borrowers of the funds. P2P lending is the new financial asset class that helps borrowers to borrow loans at considerably low rate and benefits lenders to lend funds directly to the borrowers without channelizing via banks and thereby earn higher returns.
Working Operation of P2P Lending –
P2P lending activities are initiated on online mode where the borrowers and lenders meet over the P2P lending platforms. The lenders will have their own site and borrowers can register on the same site for seeking funds. Here, the borrowers are not directly provided with the funds but proper evaluation is undertaken by the site. The site will evaluate borrowers on certain parameters such as account details, income level, employment status, credit history, historical data, etc.
The evaluation is also undertaken to capture the social media footprints of the borrowers and later on credit-worthiness of the borrower is determined. Once, the assessment of the borrowers is done on the platform, the lending firm will shortlist the borrower and proceed to lend if both agreed upon. In same way, borrowers can also choose the lenders based on certain parameters such as maximum size of loan to be availed, rate of interest, mode of payment, repayment tenure, listing or registration fees, processing charges, etc.
Benefits of P2P Lending –
- Comparatively cost advantageous for both lenders and borrowers
- Fast processing and hassle free
- Less documentation
- Services of different platforms can be compared easily
Regulation of P2P Lending –
P2P Lending is governed by RBI and it has directed the NBFC’s to obtain certificate of registration from RBI. In addition to this, RBI has a set of clauses to be accepted by P2P Lenders such as eligibility to become P2P lender, required capital structure, scope of business, operational guidelines, etc.
Though, P2P lending platforms are governed by RBI, there are still issues and challenges in the areas of reliability and authenticity of lenders, fund transfer mechanism, safety of transaction, etc.
P2P Lending is on introductory stage in India but the growth prospect of P2P is quite impressive. At present, the fund disbursements of P2P are quite low in size, but if proper regulations are put into place, then P2P lending will be the most sought after asset class to raise funds. Special attention on risk management and regulation should be given for making P2P lending safer and reliable.