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Buddy, either a borrower or lender be...

Author: Venkata Ravi Ram/Friday, October 13, 2017/Categories: Cover Feature, Save, Invest, Profit, Grow

Buddy, either a borrower or lender be...

I was able to get a loan on a much lesser interest rate for my immediate requirement of paying college fee for my daughter said Rakesh, a borrower on peerlend.in. On another platform i2ifunding.com, Santanu says, I was in need of fund urgently for medical treatment of my mother and was not getting any positive and quick assistance from any financial institution…without any hassle, the required fund was arranged…within 5 days. On the same site, Vinoth was clearer: Those who are facing financial crisis... go…without any second thought. Need a loan for a Wedding? Want to buy a new car? Bank Free = Hassle Free! Most of us would empathize with that last pitch!

Crowdfunding is the method where small amounts of money are raised from a large number of people. Your donation of Rs. 101 only, for building a new temple is an example of crowdfunding.

The temple trust is acting as the portal for the funds flow. P2P lending is a form of crowdfunding. P2P lenders are (mostly) for-profit online “marketplaces” like Flipkart or, eBay, that arrange for borrowers to deal with lenders directly. Lenders benefit from the borrower risk and credit rating models developed by the platform. As Mr. Ranganathan, a lender on the p2p portal, says “I have been associated with i2ifunding for the past three months…The response for each and every doubt …has been cleared by the team immediately…borrower’s quality also seems to be good”. For the borrowers too, it makes the process of getting loans easier, as Veniprasanna says “… difficult to get loans from Banks with so much paper work and…waiting time and hard processing of loan, Peerlend made it easy for us and we got loan within a weeks' time”. For even those who can get good loan rates, P2P offered even better rates. Reason for that is quite simple, the very low yields in bank deposits are making people look at alternative channels to invest (in this case lend money).

In the US, many P2P lenders were established in early 2000’s. It was the financial crisis in 2008 that acted as the catalyst for the sector. Public anger at the banking system, banks reluctance to lend and general chaos created the conditions for the P2P lenders to take-off.

As the recent RBI consultative paper on P2P lending says, these are largely tech companies registered under the Companies Act and acting as an aggregator for lenders and borrowers thereby, helping create a match between them. Once the borrowers and lenders register themselves on the website, due diligence is carried out by the platform and those found acceptable are allowed to participate in lending/borrowing activity. The companies often follow a reverse auction model in which the lenders bid for a borrower’s loan proposal and the borrower has the freedom to either accept or reject the offer. The lender transfers money from his/her bank account to borrower’s bank account. The platform facilitates collection of post-dated cheques from the borrower in the name of the lender as a proxy for repayment of the loan. Since all payments are through bank accounts, the KYC exercise can be deemed to have been carried out by the banks concerned.

The USPs of the P2P lending platforms over the traditional banking channels are their algorithms, credit modelling and underwriting. Bringing in variety of points like culled from networks like facebook, in addition to the traditional credit scores to reach a broader spectrum of borrowers. For ex. A German company Kreditech, which lends in countries as far and diverse as Peru to Poland, claims to use 20,000 data points in its credit modelling.

Regulators in different countries have reacted to the advent of P2P lending differently, some have exempted from regulation (China, South Korea, Tunisia etc), some treated as banking (France, Germany, Italy), as an intermediary (Australia, UK, Argentina etc), while some have prohibited it altogether (Israel and Japan). Where permitted, the p2p market is growing at a scorching pace. China’s with 4,000 portals, is approx $100Bn. US market is expected to reach $150 billion by 2025. Big players like banks, tech companies like Facebook (who own WhatsApp) and Google, all want to enter the p2p lending business. In India, Crowd funding when it comes to equity, bonds and funds is regulated by SEBI. P2P lending would come under a banking activity. Hence the interest of RBI.

As RBI admits, one of the main advantages of P2P lending for borrowers has been lower rates than those offered by money lenders/unorganized sector and the advantages for lenders are higher returns than what conventional investment opportunities offer. Interest rates and the methodology for calculating those rates vary among P2P lending platforms.

Bottom-line(s):

If you want to become a lender: P2P offers very good returns compared to banks, taxable of course. While the P2P portals with their algorithms backed by slick marketing are pushed as low-risk, fact is P2P lending is a significantly riskier form of earning interest (hence the higher rate). Fraud is a serious possibility. In China, by 2016, of the 4,127 P2P lending platforms, 1,778 were suffering issues or were a Ponzi scheme. While better returns can be expected, total loss of capital is a possibility with no legal recourse to save you. Don’t put all your eggs in this basket, esp., those who are retired.

If you want to borrow: the circumstances that made you turn to P2P in the first place and commit to a schedule of payments may deteriorate further and preclude payments in time. As RBI admits, as part of recovery process, p2p portal follows up for repayments and if need be, employs recovery agents too. Though these platforms claim to follow soft recovery practices, the possibility of use of coercive methods cannot be ruled out. Just keep in mind what happened to the borrowers from the micro-finance companies. Those that were expected to deliver the rural poor from the clutches of usurious moneylenders. After ~60 recovery-related suicides, Andhra Pradesh Government of YS Rajasekhara Reddy issued to regulation on microfinance companies. As a part of that compliance, SKS Microfinance admitted that their rates went up to 60.5% (that wasn’t a typo). They shut shop in AP and shifted to Mumbai. They also hired a brand consultant and have morphed in to Bharat Financial Inclusion. So, borrow with your eyes (wide) open.

And, that’s my 2p on p2p lending.

Venkata Ravi Ram writes commentaries on contemporary financial, business, taxation and political issues

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Venkata Ravi Ram
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