P2P Lending & Conventional Banking: A Complement or Competition?

What is P2P Lending?

Peer-to-peer (P2P) lending or crowdlending is a sort of debt financing that facilitates borrowing and lending money for the individuals without resorting to the intermediary services offered by an official financial institution. P2P lending eliminates the erstwhile existence of middleman from the loaning process. Categorised as a type of crowdfunding, P2P loans offer personal unsecured loans to individuals and small businesses intending to subscribe to educational loans, real estate loans, traditional personal loans, etc. P2P platforms provide a platform meant to match borrowers with lenders. Upon a successful matching, the parties (borrowers and lenders) decide on a rate of interest and the principal amount to be loaned. The P2P platform companies usually charge a fee to assist borrowers or lenders access or offer money. Online P2P lending is an emergent industry with the promising potential to cater to the customer base so far left underserved by the conventional financial institutions.

Regulatory Framework for P2P Lending Platforms Market

To ensure a blooming P2P lending market and to administer proper consumer protection it’s necessary to have effective regulatory structure, warranted government participation, and a meticulously devised industry structure. In the United Kingdom, the Peer to Peer Finance Association (P2PFA), a regulatory body, is established to ensure adherence to the highest standards of conduct in the P2P lending sector.

Just as is with the obligation on banks operating in India to comply with the Banking Regulation Act, 1949; the registration and conduct of P2P Lending Platforms is also now institutionalised. In India, per the Master Directions issued on 4 October 2017 by the Reserve Bank of India (RBI), the P2P entities are required to be registered with the banking regulator as NBFCs (non-banking financial companies). Ensuring compliance with the issued guidelines—Non-Banking Financial Company – Peer to Peer Lending Platform (Reserve Bank) Directions, 2017—for NBFC-P2P lending platforms is also mandatory. The RBI directions define “Peer to Peer Lending Platform” as “an intermediary providing the services of loan facilitation via an online medium or otherwise, to the participants.” The word ‘participants’ used in the definition means ‘a person availing NBFC-P2P services to lend or to avail loan facilitation services.

The RBI issued guidelines mandate a company looking to register as an NBFC-P2P in India, apart from holding a Certificate of Registration, to be having a net owned fund of a minimum of rupees twenty million. It’s also necessary for NBFC-P2Ps to draft a Fair Practices Code in consonance to the RBI notified guidelines for NBFC-P2Ps.

NBFC-P2P: A Complement or Competition to Conventional Banking?

NBFCs offering P2P lending solutions should essentially be perceived as complementary to conventional banking. Initially, the banking sector might consider the advent of NBFC-P2Ps to be a competing alternative (injecting a performance inducing and inclusive behaviour into the banking culture) available to be accessed by the erstwhile marginalised sect of customers—due to unavailability of compelling assets to offer as collateral. The future lending solutions offered by conventional banks seem to be a result of them acclimatising to the presence of NBFC-P2Ps. The banks would either partner with third-party P2P lending platforms or offer their standalone (proprietary) lending platforms. The banks could also opt to follow the path of marketing P2P borrowing to their incumbent clientele and make suitable credit provisions for the specific segment of customers otherwise not qualifying for conventional bank lending. Notably, as reported by The Plunge Daily, by Q4 2016, loans having the value of over $4.5 billion were issued through the online P2P lending platforms in India. The investor community perceives P2P lending platforms as a promisingly new alternative asset class as it offers the gain of realising fixed and higher returns independent of any market-linked instability. This is one of the primary factors making conventional market-linked investment instruments less appealing. The P2P lending platforms also offer to the investors convenient access to liquidity even in the absence of any traditional lock-in phase. Moving forward, the P2P model of lending in India will also need to put in place a robust mechanism in relation to assessing the quality of credit risk, safeguard the consumer interests, thwart any money laundering attempts, and developing an efficient redressal mechanism.