P2P Lending – Quick thoughts

The peer to peer lending market in India (“P2P Lending”) has witnessed rapid growth in the recent past. The nature of the product and the inherent risks in P2P Lending as a model necessitates the need for regulation. As has generally been the case, the Reserve Bank of India (“RBI”) has allowed the market to develop, evaluated the situation and is now looking at regulating the segment in a channelized manner so as to eradicate any risks that such institutions may pose on the system. This note gives a brief idea as to what P2P Lending entails and how this market will probably evolve in the coming days.

P2P Lending is essentially a mode of lending to individuals or businesses through an online platform. This alternative mode of funding gained momentum in the aftermath of the financial crisis and acted as a catalyst to fill the vacuum created by the difficulties faced in the banking and the traditional lending system. The benefits around reducing the cost of capital and at the same time increasing the access to capital are the main reasons for this segment to evolve and develop. As on date, P2P Lending has established a stronghold in the United States of America, the United Kingdom and the People’s Republic of China.

Currently in the Indian market, evolution of the P2P Lending segment is at a nascent stage. Some of the known players of this segment are Capital Float, Indifi Technologies Private Limited, Faircent, I-lend, Lendbox and i2iFunding. There are several small businesses especially in Tier II and Tier III cities that are seeking funding; however only a handful have access to institutional credit. P2P Lending institutions have come to the aid of such businesses and individuals by creating a market for lenders and borrowers to connect instantaneously. Such P2P Lending models are a mix of technology coupled with an established as well as innovative method of accessing finance. They play a pivotal role in creating a large market, processing a large number of transactions efficiently and using data to price products and mitigate risk. RBI is considering regulating this market to mitigate any risk that they pose to the financial system. The requirement of conducting KYC check, credit check, etc. would apply to this segment if not mutatis mutandis, at least in principle. At the same time, the expectation is that RBI would ensure the ability of developing innovative methods for making the entire process efficient.

As a concept, P2P Lending resonates with crowd funding. RBI has, in its First Bi-Monthly Monetary Policy Statement issued earlier this month stated that RBI shall, in consultation with the Securities and Exchange Board of India (“SEBI”) put in place a concept note on P2P Lending by end April 2016.

Financial markets would remember that SEBI had, in 2014, issued a consultation paper for the crowd funding industry in India. The main objective of the consultation paper was to provide start-ups and small and medium enterprises a new source of financing and at the same time ensure investor protection. The consultation paper detailed out the different categories of crowd funding which included P2P Lending. It also laid down the prevailing international rules and regulations pertaining to the same. Formal guidelines are not yet in place.
Both P2P Lending and crowd funding are essentially unconventional modes of funding. Given the “Make in India” pitch and push being given to start-ups generally, the financial market is eagerly waiting for end April to see how the two regulators would work in tandem to govern this segment.

The innovations attached to P2P Lending and the market space itself needs to be understood and appreciated to recognize that this alternative mode of funding is a step in the right direction and therefore needs to be nurtured in a correct manner. How the P2P Lending model ties in (and whether it ties in) with other regulated segments, such as AIF, CIS, PSS*, etc. would also need to be evaluated.

Whether it is RBI or SEBI, what is crucial to note is that P2P Lending as a model is here to stay. End April would throw light on what the regulator has in mind for this new financial product / service.

*  Alternative Investment Funds, Collective Investment Schemes and Payment and Settlement Systems.

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