This research study on ‘Peer to Peer (P2P) Lending is by Nikita Srivastava and Sambhavi Chowdhury who were PG in Risk Management students at GRMI. Prior to opting for a risk management course in India, Nikita, a B.Com graduate was working with Axis Bank Ltd., and Sambhavi did her graduation in B.Com. Currently, they both have prospering risk management careers. Nikita is placed at PwC Risk Assurance and Sambhavi is interning with Wipro Limited. They both agree that PGDRM is one of India’s greatest job-oriented courses.

Here is their combined research study:

Peer to Peer (P2P) Lending

By Nikita Srivastava and Sambhavi Chowdhury, PGDRM July’21-22

What is P2P Lending?

✓ The practice of lending money to unrelated individuals, or “peers” without going through banks or other traditional financial institutions.

✓ It functions as an online platform offering ease of access, flexibility, and choice of lending and borrowing for lenders and borrowers.

✓ Enable lenders to earn interest higher than bank savings, while borrowers can obtain funds easily.

✓ Came into existence in the year 2012 in India.

✓ The total size of the lending market in India rose to Rs 156.9 lakh crore as of March 2021.

✓ The Indian P2P lending Market size is forecast to reach $10.5 billion by 2026.

Traditional v/s P2P Financing

Advantages of P2P Lending

For Borrowers: Fixed Rates Simple and fast application for low CIBIL score borrowers and SMEs

For Lenders: Higher returns Opportunity for diversification Simple to understand Opportunity to perform better

For P2P Platforms:

Lack of an expensive intermediary
Creditor and borrower determine the conditions
Thorough inspection
Small interest rate, Higher returns

Business Model of P2P Lending

Client-Segregated Account Model

This is the simplest and most transparent form of the P2P model, where the lenders directly interact with the borrowers and they themselves fix their counterparties.

• Borrower first gets listed with the amount required on the P2P site for the lender to identify and act on the loan request.

• After successful identification and assessment of creditworthiness and various other factors, the lenders then release the funds in favor of the borrowers in a specific account called the Investor Sub-Account maintained with the P2P company.

• After the funds reach the borrower, the P2P company charges their administration fee from both of the clients.

• At the time of repayment (both principal and interest) the borrower deposit the amount in the same Investor Sub-Account. These funds are then transferred to the lender’s accounts.

Here the lenders do not face any risk of losing their money in the event of bankruptcy of the P2P company as there is a direct agreement between the lender and the borrower, nor the company faces any risk of claims from the lenders in case of default of the borrowers

Notary Model

This is a much more complex form of P2P business, which involves a commercial bank apart from the lender or the borrower.

• Borrower first put in their loan request on the P2P site & company then forward the loan request to a commercial bank associated with it, the bank then sanction the loan and issue a loan promissory note to the company.

• Company then forward the promissory note to the borrower & charges its administration fees. The borrower then submits the promissory note to the issuing bank & bank in return pays the promised loan amount to the borrower.

• Meanwhile company lists the loan request on its website once there are sufficient funds with the company from the lenders, the company immediately buys the loan receivables from the commercial bank. And issues pass-through certificates (PTC) to lenders in proportion to their fund in a single loan & charges administration fees.

• At the time of repayment of the loans, the borrowers pay the company which is passed to the lender’s accounts held with the company.

How do P2P platforms make money?

Peer-to-Peer (‘P2P’) lending companies are middlemen. Their principal goal is to connect investors with credit-worthy borrowers. The P2P platform benefits from matching the two parties. Each platform has its own distinct fee structure, but there are common trends in the ways that fees are generated:

How to get started with Borrowing & Lending?

Upload scanned copies of documents (Id Proof, Tax Return, Salary Slip)

After registration, the P2P risk assessment team verifies & evaluates your profile if passed borrower’s profile will get listed with the requirement of the loan amount on the platform

Similarly for lending also you need to get register with your email address, mobile number, id proof and bank statements

Lender team on the P2P platform will approve your account after verification within one working day post which the registered lender can start lending after logging

Registration (profile) can be turned down by a P2P platform for borrowing and lending in case the details provided are inadequate or unfit to borrow or lend as per the standards set by them

“CRED Mint” a new P2P Model launched by CRED

➢ CRED rolled out its peer-to-peer investing product CRED Mint, in association with Liquiloans, an RBI-registered P2P NBFC.

➢ CRED has made the process of investing money with Mint easy, transparent, and fast. Members can put in between₹1,00,000-₹10,00,000 in under two minutes, commission-free.

➢ Lenders can request withdrawal in one click, partially or in full at any time with no penalty, and earn interest for the period invested.

➢ After a successful pilot with team members, the product is being rolled out to CRED members.

➢ The phased rollout is to ensure that each investment made in CRED Mint is managed responsibly-minimizing risks by diversifying investments across 200+ borrowers on average.

Who facilitates the P2P lending platforms?

• P2P lending platforms are regulated by the Reserve Bank of India (RBI).

• From October 2017, RBI made it mandatory for all such companies to have Peer to Peer lending registration in order to protect the interest of lenders and borrowers.

• In December 2019, the Reserve Bank of India (RBI) allowed lending on peer-to-peer (P2P) platforms to the tune of Rs 50 lakh, up from the previous limit of Rs 10 lakh.

• Peer to Peer lending companies fall under the category of NBFC and hence, for functioning as one, they need NBFC Peer to Peer lending registration with the RBI.

• To obtain the Certificate of Registration for P2P Lending business, one must possess a Net worth of INR 2 crores.

• If a company was already involved in such business before the Certificate of Registration was made mandatory, then the company shall fulfill all conditions as laid down by the RBI.

RBI guidelines for P2P Lending

• P2P lending platforms must become members of credit information companies and make financial data available to RBI.

• P2P lending platforms cannot offer a guarantee on the loan.

• The borrowers must be grouped according to their creditworthiness, income, etc.

• A lender can only lend a maximum of ₹50,00,000 across all P2P platforms and borrowers at any given time.

• A lender must provide proof of net worth to lend more than ₹10,00,000 across all P2P platforms. The proof must be certified by a practicing Chartered Accountant.

• Borrowers can take a loan of up to ₹10,00,000 across all P2P platforms.

• One lender can only lend a maximum of ₹50,000 to the same borrower across all P2P platforms.

Risks in P2P Lending

Credit Risk

The most “commonplace” reason for losing money on some loans is when your borrowers aren’t good enough. When they can’t pay back all your money, this is called “credit risk”

Concentration Risk

If you lend to one borrower, it might not matter how brilliant the P2P lending site is at assessing loan applications, you could get unlucky and lose lots of money. This is called “concentration risk”

Platform Risk

This one is about the risk of losses due to peer-to-peer lending sites going bust. If one of the P2P lending sites that you use collapses, there’s also a substantial risk that you may experience delays in getting your money back. This is all called “platform risk”

Fraud Risk

All types of saving products or investments, from the stock market to property and beyond, attract some fraudsters or even people who commit criminal (or near-criminal) negligence & when it does happen, the consequences are likely to be more severe on your wallet

Regulatory Risk

The government does not provide insurance or any form of protection to the lenders in case of the borrower’s default

Liquidity risk

The ability to sell your loans early before your borrowers repay them naturally –is not a promise or a sure thing. It’s just something that you might be able to do

Competition Risk

Facing the severe threat of disruption with the arrival of big technology firms in the lending sector. Players such as Amazon with large retail customer base have entered the lending marketplace by partnering with various existent lenders

Risk of Outflow exceeding Inflow

There is insolvency risk, when cash outflow is more than the inflow i.e. there are more borrowers than lenders

Data Privacy Risk

Information system of P2P platform is not perfect, full of loopholes and once it is attacked by hackers, the overall business process will break down. The safety of websites cannot be guaranteed, personal data can easily be stolen.

Operational Risk

The P2P with a low threshold, there is no mandatory requirement for management qualifications and professional qualities of the operators. This causes staff to be of varying quality and many credit officers cannot make accurate judgments about the credit and operation situation of the borrowers, which enlarges the information asymmetry before loaning and makes it more difficult to manage the after-loaning risk

References

https://mangosoft.tech/blog/top-5-peer-to-peer-lending-companies-2020-full-market-research/
https://economictimes.indiatimes.com/wealth/p2p/how-are-interest-rates-set-on-p2p-platforms/
https://www.investopedia.com/articles/investing/092315/7-best-peertopeer-lending-websites.asp
https://www.corporatecomplianceinsights.com/p2p-lending-risks-and-business-models/
https://www.4thway.co.uk/guides/peer-to-peer-lending-risks/
https://www.moneycontrol.com/news/business/personal-finance/lending-on-p2p-platforms-a-risky-proposition-not-an-investment-4929701.html

Get the full research study here: P2P lending

Disclaimer

This report has been produced by students of Global Risk Management Institute for their own research, classroom discussions and general information purposes only. While care has been taken in gathering the data and preparing the report, the student’s or GRMI does not make any representations or warranties as to its accuracy or completeness and expressly excludes to the maximum extent permitted by law all those that might otherwise be implied. References to the information collected have been given where necessary.

GRMI or its students accepts no responsibility or liability for any loss or damage of any nature occasioned to any person as a result of acting or refraining from acting as a result of, or in reliance on, any statement, fact, figure or expression of opinion or belief contained in this report. This report does not constitute advice of any kind.

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