Peer-to-peer lending (P2P)
platforms would be treated as non-banking financial companies (NBFCs) and
regulated by the Reserve Bank of India (RBI), the Government said in a
notification on Wednesday.
The central bank will soon
release the final guidelines for these platforms.
What is P2P lending ?
P2P lending is a crowd-funding
model (largely online) where people looking to invest their money with people
who want to borrow can do so. The concept is centered around savers getting
higher interest by lending their money instead of saving and borrowers get
comparatively lower interest rates.
Borrowers are either individuals
or small businesses. But unlike a traditional savings account, one can lose
money if the borrower defaults.
Regulation in India
Till April 2016, there were
around 30 start-up P2P lending companies in India. Although nascent in India
and not significant in value yet, the potential benefits that P2P lending
promises to various stakeholders (to the borrowers, lenders, agencies etc.) and
its associated risks to the financial system are too important to be ignored,
according to RBI.
Global cumulative lending through
P2P platforms at the end of Q4 of 2015, had reached 4.4 billion GBP
(approximately Rs 38,300 crore) from 2.2 million GBP (about Rs 19 crore) in
2012.
At present, it is partially or
fully regulated in Australia, Argentina, Canada (Ontario), New Zealand, United
Kingdom, France, Germany, Italy and USA while it is banned in Israel and Japan.
China has the largest P2P market in the world, with hundreds of platforms
offering diverse services, but the sector is not regulated currently.
How does it work?
Firstly, decide on how much you
wish to lend, and for how long. The investors’ funds could be tied up for up to
5 years, so it’s important to be comfortable with this timescale. Remember, you
are lending to those wishing to borrow, and 1-5 year loans are the norm.
Some companies offer the option
to withdraw your funds during the loan term. There may be a cost for doing this
and you'll have to wait until another lender comes in to replace you, but it is
there should you need it. Ideally though, you want to avoid doing this, as
you’ll lose out on the great rate of return.
Operation model in India
P2P lending platforms are largely
tech companies registered under the Companies Act. 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.
Some platforms provide several
additional services like credit assessment, recovery etc. In most cases, the
platform moderates the interaction between the borrower and the lender.
Documentation and checks
P2P platforms leverage metrics
such as credit scores and social media activity to link borrowers and lenders
at favourable interest rates. At present, such platforms have very low
regulatory restrictions because they merely act as intermediaries between
borrower, lender, and partner bank.
The documentation for the lending
and borrowing arrangement is facilitated by the P2P platform. 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.
The P2P forum, in general, also
helps in the recovery process and as part of this, follows up for repayments
and if need be, employs recovery agents too.
The regulatory concerns in such
cases would relate to KYC (know-your-customer) and recovery practices. Since
all payments are through bank accounts, the KYC exercise can be deemed to have
been carried out by the banks concerned. Though these platforms claim to follow
soft recovery practices, the possibility of use of coercive methods cannot be
ruled out.
Source - moneycontrol.com
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