Everybody is busy dissecting the\u00a0Rs20 trillion-plus package for the revival of Asia\u2019s third largest economy under attack from Covid-19. The Reserve Bank of India (RBI) has created many windows for liquidity and banks are under pressure to lend, both from the regulator as well as the government.<\/p>\n
This is the right time to push for the peer-to-peer (P2P) lending platform, which has not taken off as yet. The P2P business model entails collection of money from individuals and lending to individuals as well as micro and small enterprises.<\/p>\n
While banks are grappling with risk aversion and savers are seeing an erosion in the value of money (the savings bank rate of most banks are far below the retail inflation figure now), the P2P platform can be a win-win for both borrowers and lenders. Credit-starved individuals and small business units can get money to restart their businesses and\u00a0investors\u00a0can earn higher returns.<\/p>\n
In March 2016, the RBI issued the first draft on P2P lending for consultation with the stakeholders. It finalised the licensing norms in December 2017. Apart from being \u201cfit and proper\u201d to be in the business of money, a P2P lender needs to have at least Rs2 crore net-owned funds.<\/p>\n
All loans are collateral-free. Till recently, for a lender, the amount of a loan was capped at Rs10 lakh; it is Rs50 lakh now. For the borrower, the limit is still Rs10 lakh. Typically, the interest rate charged to the borrowers is in the range of 18-20 per cent but it can be as low as 11-12 per cent,<\/strong>\u00a0depending on the customer\u2019s profile. The platforms earn fees from both the lenders and the borrowers.<\/p>\n Like any other entities in the financial sector, P2P lenders need to follow the normal disclosure norms, report every quarter and are subject to RBI audits.<\/p>\n The RBI has probably issued 20 licences so far but around a dozen have gone live in different metros. Being digital, some of them are lending and raising resources across India. Even though there is a P2P lending association, no official industry data is available. One of the P2P lenders puts the amount of monthly loan disbursements by all at around Rs60 crore.<\/p>\n Most borrowings are between Rs.50,000 and Rs.1.5 lakh even as the lenders are investing between Rs.3 lakh and Rs5 lakh. Individuals \u2013 both salaried and into small business running mom-and-pop stores — are the typical borrowers.<\/p>\n How does it work? The entire process is digital. The borrowers come online to the P2P platform, fill an online form, upload documents such as PAN, Aadhaar, income tax and GST returns and bank statements. In the second stage, the platform does the\u00a0screening\u00a0<\/strong>which includes speaking to the customer to decide on the creditworthiness of the prospective borrower and the interest rate. The duration of a loan can be up to three years.<\/p>\n Once the borrower agrees to the terms and conditions online, the platform starts the crowd-funding process. The borrower pays monthly\u00a0loan instalments. The P2P platforms cannot touch the money; it flows into an escrow account in a bank, managed by a third party.<\/p>\n The default risk of a borrower is taken by the investor but all avenues are available to a P2P platform to collect the money, including tele-calling, field collection, and even legal action. All defaults are reported to the credit bureaus to block the defaulter\u2019s access to formal credit channels.<\/p>\n The process for lenders to be on board is similar. They come online to the P2P platform, fill online forms, upload the so-called KYC documents, transfer money from their bank account to an escrow account and choose\u00a0lenders\u00a0on the P2P lending marketplace. They receive monthly repayments from the borrowers.<\/p>\n Zopa of the UK, the first P2P lending company globally, started its business in 2005, directly matching people looking for a loan with investors looking for a handsome return. It has lent over \u00a35 billion to almost half a million borrowers and generated \u00a3250 million income for its investors.<\/p>\n Within months of Zopa\u2019s entry, the US saw the birth of its first P2P lender \u2013 Prosper.\u00a0Headquartered in San Francisco, Lendingclub followed the next year.<\/p>\n The global roll-out happened when New Zealand (Harmony, Squirrel Money, et al) and China joined in the current decade. China\u2019s unregulated P2P lending industry crossed $200 billion by 2018, more than the rest of the world combined, when regulations were introduced. Since then, the industry has been shrinking.<\/p>\n This could be the right time to offer some incentives to the P2P industry at home. There could be tax incentives for individuals who lend in the P2P marketplace. They can be allowed to earn up to say, Rs5 lakh a year tax-free income. This will encourage the savers to come forward and create the flow of credit.<\/p>\n Going by RBI norms, all lenders need to bring in money from their bank accounts in India. Why not allow the NRIs to participate? As interest rates are moving south globally, the P2P marketplace can attract money from overseas with higher returns. The rising flow of funds for lending will push down the interest rates for the borrowers.<\/p>\n To encourage the lenders, the RBI can allow P2P platforms to offer secured loans too and raise the limit beyond Rs50 lakh. This will\u00a0enthuse\u00a0high networth individuals (HNIs) to park money here. The RBI can allow family offices too to invest here. Going beyond stocks, bonds, gold and real estates, the HNIs and family offices have started investing in alternative investment funds. They can enter this space once the regulator allows them.<\/p>\n In 2012, the UK government invested \u00a320 million into British businesses via P2P lenders. A second investment of \u00a340 million was announced in 2014 to bypass the high street banks that were reluctant to lend to smaller companies.\u00a0Since April 2016, investments in the P2P market in the UK have\u00a0started getting\u00a0tax\u00a0advantages too.<\/p>\n The investors do not qualify for protection from the\u00a0Financial Services Compensation Scheme, which provides security up to \u00a375,000 per bank, for each saver,\u00a0but regulations mandate that the companies must ensure servicing of the loans even if the platform goes bust.<\/p>\n The escrow mechanism in the Indian P2P market is lifted from the Finance Conduct Authority\u2019s blueprint for P2P lending in the UK. The RBI can take a look at some of the other UK norms to boost the industry now.<\/p>\n","protected":false},"excerpt":{"rendered":" Everybody is busy dissecting the\u00a0Rs20 trillion-plus package for the revival of Asia\u2019s third largest economy under attack from Covid-19. 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