Peer to Peer Lending

May 1, 2016

What is it?: The primary function of finance is to facilitate movement of money. Financial intermediaries are those that help in moving money at lowest cost, risk and time. More elaborately financial intermediaries move money, store money, lend money, invest money, authenticate transactions of money and account for money. Hitherto in India banks and NBFCs have been the primary channels that are involved in the business of lending. Most recently a new class of players has emerged at the intersection of connectivity, social interactions and data availability, which facilitate a more direct means of connecting investors with borrowers called Peer to Peer platforms or P2P platforms. P2P lending as prevalent is the practice of lending money to individuals or businesses through online services that match lenders directly with borrowers.

What is the big deal?: In an ideal world, entities would not need intermediaries to deal with other entities. This would mean that the cost and time gap would be near zero, but would only happen if the risk in such a transaction is also near zero. The primary reason we require intermediaries is to bring trust into the transaction. Intermediaries undertake various processes such as know your customer (KYC) and rely on several systems (such as credit bureau) in order to guarantee trust. A P2P platform is a remarkable development, as it addresses the trust issue directly. A common connection or a prior relationship between lenders and borrowers is not necessary to participate on the platform.

Early trends and a misnomer: Given its inherent attractiveness, P2P lending has scaled up quickly in other parts of the world. China is home to the largest alternative finance industry with a massive 1575 alternative finance players US has a burgeoning industry which is estimated size of USD 4 Billion, UK has been an early adopter with a GBP3.2 billion market by 2015, . Marketplaces promise to de¬liver much lower cost of delivering credit than traditional channels like banks. In India too this model is gaining traction and it is estimated that over 30 P2P platforms have sprung up with over 20 being started in the last one year.

Regulation catches up: Naturally regulators around the world are taking note. RBI too has issued draft guidelines, proposing regulation of legal form, minimum capitalisation, prudential norms and customer protection. It remains to be seen whether regulation will promote or stifle growth, both in India and across the world.

Sign of things to come: Whether marketplaces catch on and grow or disappear, they will certainly jolt the financial system into changing the way business is transacted, by impacting the speed at which transactions take place. Another change will be in leveraging digital flows. Beginning from Knowing clients digitally (e-KYC, social media access), to e-fulfilment (Biometric, e-sign) to e monitoring, there is set to be a paradigm shift in how banks and NBFCs perceive risk and opportunity. The onus is now on Varam as a digitally aware MFI to imbibe these trends and prepare to be a leader on all things digital.

(Contributed by Raghav Narayan, Consultant for Varam)

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