P2P: Diversifying the Financial Sector in India
Over the decades, the financial sector has undergone complete makeover and added new colours on its canvas as a result of industrilastion and latter due to globalisation. In this journey technology has been the major driver in formulating new products, catering users their needs and enabling them to aspire for more customized services at their doorstep. Since beginning, Borrowing and lending has been the building block in economic development and attracted borrowers for raising funds at better cost and lenders for earning attractive yield in market place. Regulators ever tried to develop such a framework that enables a customer to fulfill his financial need at appropriate cost within standard stipulated time frame.
Peer to peer (P2P) lending, has gathered momentum across the globe and slowly mushrooming in India. It is a platform which provides on-line access through network to borrower and lender and enables them to match their requirement by striking a deal. At market place, Customer as borrower always seeks hassle-free funds at low cost and at the same time as a lender he aspire for high yield on his parked funds at calculated risk. P2P portal invites bids from investors to lock-in their funds for expected yield and simultaneously invites bids from borrower for their funding requirement against the interest rates charged for the respective period. This model is big threat to conventional banking system since it challenges to replace the available banking channel in economy and bridge the gap between lender and borrower by offering them real time access through network along with added features like Credit scoring of customers, Customers KYC and due diligence compliance, Credit counseling, loan recovery services at reasonable cost and as per customers` requirement at their doorstep.
This model of funding varies from crowd funding where various investors park their funds in any project that offer them anticipated yield as per their risk tolerance capacity. Crowd funding transforms saving into capital formation and normally regulated by capital market regulator while P2P fall within the purview of banking regulator that draft guidelines considering investors` interest and market practices prevailing across the globe. Various countries regulate crowd funding and P2P considering their national economic interest avoiding any contradictory legal issues.
Global Economies and P2P Lending:
Across the globe P2P lending has been regulated in five different ways which has been well depicted by table hereunder:
|Prohibited||Israel & Japan||P2P lending is totally banned.|
|Banking Regulation||France, Germany and Italy||P2P lending platform is regulated as Banks due to their credit intermediation function. They are required to obtain a banking license; fulfill disclosure requirement and other such regulations.|
|Intermediary Regulation||Australia, Argentina, Canada, New Zealand and U.K||P2P lending platform is required to register itself as intermediary In order to access the market. Other rules and regulation determine modus operandi need to be followed by the platform (like licensing is needed for credit or financial services.|
|Unregulated||China, South Korea, Egypt, Ecuador and Tunisia||No specific regulation is in fashion to regulate P2P lending Platform however in some cases consumer protection from unfair interest rates, unfair credit provision and fake advertising is in existence.|
|US Model||U.S.A||Here two level of regulation is in existence for regulating P2P lending platform, Federal regulation through the SEC (Securities and Exchange Commission) and State level where Platforms have to seek state-wise approval as certain state (like Texas) outright ban the practice of P2P lending while other states (like California) place limits on the type of investors using the platform to lend. In case P2P platform wishes to operate across multiple states, separate approval from each is required.|
The US is the largest P2P lending market in the world by loan volume, but the UK’s is 72% larger on a per capita basis. By the end of year 2015, global P2P market share has crossed approximately USD 64.00 Billion and expected to touch USD 1000.00 Billion by the year 2025 at current estimates.
Although the P2P lending industry is flourishing by leaps and bounds, if market analysts are believed, there are serious risks also that could derail it. Major risks are Interest rate hikes, new regulations, frayed bank relationships, and other factors could put a stop to the industry’s current surge. Credit consumers and investors interest are basic challenges that need to be considered proactively.
Alternative Finance Model:
Across the globe various Finance Model is available along with P2P lending in the financial market where consumers deal as per their requirement considering the risk factor and liquidity. Other important factors are yield on investment and hassle-free access of credit that score above all in creating the market share. Among the various alternative finance model available, different platforms of P2P lending and Crowd funding are highly demanded which is well depicted by Table 3 below. By the end of year 2015 only P2P consumer lending has achieved the market share of GBP 909 Million.
P2P Lending in India: Whether we Need It
In current banking scenario when NPA’s (Non Performing Assets) have been making headlines as Bank after Bank reeling under burden of Bad Debts, P2P lending Platforms have started developing in India but still at a very nascent stage. Various firms have created P2P virtual platforms and mainly focusing on micro credit by targeting unbanked customers, start-ups and consumers financed by unorganized financial sector. Their approach is to make virtual platform accessible for borrower’s who need fast credit within short span of time at very reasonable cost so trying to lure borrowers, who have pathetic banking experience or fed up dealing with banks for financial service, are their soft target and investors who always hunt for better yield in market.
Since regulatory guidelines in India for P2P lending is still underway so major issues before the regulator comes pertaining to KYC & AML (Anti Money Laundering) compliance, protection of investor interest, Risk management policies and procedure followed by them. Recovery procedure adopted by the P2P platform operators is still a moot matter because financial records is live indicator how various NBFCs and other financial units have minted money by luring public for higher returns and tarnished the image of regulator usually strive for better governance.
Whether Indian economy needs P2P lending platforms when banking industry is catering the various needs of financial market and when government is leaving no stone unturned for Covering the unbanked population under financial inclusion by launching PMJDY (Prandhan Mantri Jan Dhan Yojna) and several other schemes mainly to assist and uplift the bottom layer of the society and when RBI is playing proactive role in regulating the NBFCs and banking industry where global norms like Basel III, FATCA (Foreign Account Tax Compliance Act) and IFRS(International Financial and Reporting Standards) are adopted with great care.
No official valid data is available but as per media reports around twenty P2P lending platforms are in operation in India presently which cater the various need of customers along with added features like KYC compliance of customers, Due diligence of borrowers, loan recovery facility at nominal cost to customers who seek fast credit facility at low cost within limited time span and investors or lenders who seek higher yield on their parked funds.
One Gurgaon based P2P platform, Faircent offers credit facility for business funding, wedding, home improvements etc. while invites bids from the lenders at very handsome rate than what market offers. They help eliminate the high margins which banks and financial institutions make on customers transactions. Their format allows them to keep institutional charges at a bare minimum and simply pass on this benefit to customers! Here, customers can interact directly with fellow borrowers/lenders, negotiate terms and conditions about interest rates, tenure of loans, etc, and strike a deal on their own, without any intervention/imposition from firms’ end. Customers pay them a simple Listing fee. They do not earn out of customers’ interests and hence they claim for not earning out of every EMI in customers’ transactions.
With the Advent of technology, financial markets are diversifying day by day hence proactive action and sturdy legislation from the regulator to protect investor interest and ensuring hassle-free credit to consumers is prerequisite for smooth operation of P2P lending platforms. Risk management policies and procedures need to be adhered and risk tolerance limit of individual P2P platform need to be fixed. Minimum capital requirement should be well documented and reviewed annually. Their audited result should be published in public space and regulator needs to frame annual financial inspection in order to curb any manipulation at latter date.
Since P2P lending platform would be regulated by RBI in India, protecting the interest of NBFC and Banks which is already reeling under various challenges as high capital requirement under Basel regime, high stressed assets, decreasing level of experienced personnel base etc. and if customer base start shifting towards other market place, high stress on banks’ NIM (Net Interest Margin) could be observed and leads to negative organic growth.
Praveen Kumar Srivastava, Faculty Dena Bank