Peer to Peer (P2P) Lending – a Niche in the Financial Ecosystem

Written By Joydeep Sen, Financial Planner and Founder, Wiseinvestor.in
Email : joydeep@wiseinvestor.in

MUMBAIApril 6, 2018 : Investment avenues are available either in the form of instruments per se (e.g. equity stocks, bonds, etc.) or as vehicles for participating in the instruments e.g. Mutual Funds, Portfolio Management Services, Alternate Investment Funds, etc. Some of the vehicles are available in small ticket sizes, e.g. Mutual Funds, whereas some require a sizable ticket e.g. PMS (Rs 25 lakh) or AIF (Rs 1 crore). There is a differentiated investment avenue, which is neither a tradable instrument nor a structured vehicle, but a facilitator for retail investors. This is called Peer to Peer (P2P) Lending where there is an online intermediary, which brings the lender and borrower together to facilitate direct lending by the lender to the borrower on mutually agreed terms. This is an online marketplace where the digital platforms like e.g. IndiaMoneyMart would conduct due diligence and credit assessment of the borrower and connect the two individuals.

The principal benefit of P2P lending for borrowers is the fast and convenient access to funding, while for investors it is the potential for high returns. P2P Lending as Alternative Asset class is fast gaining popularity in India in view of significant returns of 20%-25% per annum as compared to 7%-9% in other conventional asset classes like Fixed Deposits and Debt Mutual Funds.

The RBI released a Report titled ‘Working Group on FinTech and Digital Banking’ on 8 February ’18. The Report states, “While P2P lending originally involved direct matching of individual lenders and borrowers on a one-to-one basis, it has evolved into a form of marketplace lending where institutional and high net worth individual investors lend into a pool that borrowers can access.” Mr Mahendra Agarwal, Director, IndiaMoneyMart, comments “this enables retail lenders and borrowers to go through a formal system, without the ticket size or rigmarole involved in other financial instruments.”

The RBI Report states “Peer to Peer (P2P) lenders connect lenders and borrowers, using advanced technologies to speed up loan acceptance. These technologies are designed to increase the efficiency and reduce the time involved in access to credit. Depending on the structure, P2P may involve simple matching, deposit taking, or management of a collective investment scheme. Since P2P lending companies operate entirely online, they can run with lower overhead and provide services more cheaply than traditional financial institutions. As a result, lenders often earn higher returns compared to savings and investment products offered by banks, while borrowers can borrow money at lower interest rates. The most common form of P2P loan is an unsecured personal loan, but start-up and small-business loans are also becoming important.”

This is an important economic function performed by P2P Lending platforms. In other instruments, the expenses involved are higher. There are overheads, there are expenses charged to the fund (the scheme) every year or there are transaction brokerages at every leg. In P2P lending, the benefits of lower running costs are passed on by the facilitator to the users of the system. Going forward, with the spread of digitalisation, cost of intermediation is going to be an important factor in the world of financial service providers.

P2P services are in a way comparable to investment services offered by robo-advisers, which is cost efficient and available to people who do not have the ticket size for high-end wealth management outfits. The net-savvy current generation will gradually lap up these services. With continuous growth in digital banking across payment platforms and large penetration of mobility in terms of smartphone users across India, P2P Lending in India is expected to grow significantly in the coming years in line with its global peers.

About India Money Mart

IndiaMoneyMart, (a FairVinimay Services Pvt. Ltd. initiative) is an easy, convenient and hassle free lending/borrowing marketplace where Lenders and Borrowers interact directly and strike a deal amongst themselves. Primarily, the Lenders and Borrowers interested in providing/seeking a loan, completes a simple application on IndiaMoneyMart to lend or borrow as an Individual or as a Corporate member through this platform.

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