 "Peer-to-peer (P2P) lending: What is it, and who regulates it in India? (1)")
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The Reserve Bank of India (RBI) asked peer-to-peer (P2P) lending platforms to halt certain activities after inspections by the central bank found misleading sale practices and rule violations by such platforms.
Between June and September this year, the central bank conducted inspections of at least ten lenders. The RBI said some lenders failed to comply with the central bank's guidelines. Following the inspection, the RBI found several violations, including improper re-lending of repaid funds and marketing of products as an alternative to bank deposits.
The Indian regulators have intensified their scrutiny of the growing consumer finance services, including peer-to-peer lending.
What is peer-to-peer (P2P) lending?
Peer-to-peer (P2P) lending is the practice of lending money to individuals or businesses through online services that match lenders with borrowers, cutting out the financial institution as the middleman. P2P lending, also known as "social lending" or "crowd lending", has been around since 2005.
The P2P lending companies often offer their services online, and attempt to operate with lower overhead and provide their services more cheaply than traditional financial institutions. This helps lenders earn higher returns compared to savings and investment products offered by banks, while borrowers can borrow money at lower interest rates, even after the P2P lending company has taken a fee for providing the match-making platform and credit checking the borrower.
Websites that facilitate P2P lending have increased their adoption as an alternative method of financing.
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How does P2P lending work?
The P2P lending websites connect borrowers to lenders. The rates and terms are set by each website, and it enables the transaction.
First, an investor opens an account with the site and deposits a sum of money to be dispersed in loans. The loan applicant posts a financial profile, which is then assigned a risk category that determines the interest rate the applicant will pay. The loan applicant can then review offers and accept one. The monthly payments and money transfers are handled through the platform. The process can be entirely automated, or lenders and borrowers can choose to haggle.
Some sites specialise in particular types of borrowers, such as Funding Circle, which focuses on small businesses; Lending Club has a "Patient solutions" category that links doctors who offer financing programmes with prospective patients.
Who regulates P2P lending in India?
In India, peer-to-peer lending is regulated by the Reserve Bank of India (RBI). In 2017, the RBI published a consultation paper on regulating P2P lending, and the final guidelines were released.
In 2016, there were around 30 peer-to-peer lending platforms in India. Even with a first-mover advantage, many sites could not gain market share and grow their user base, possibly due to the reserved nature of the Indian investors or lack of awareness of this type of debt financing. However, P2P lending platforms in India are helping a huge section of borrowers who have been rejected or have failed to qualify for a loan from banks.
As of August 31, 2019, as many as 19 companies have been granted licences by the RBI.
Is P2P lending safe?
Peer-to-peer lending is riskier than a savings account or certificate of deposit, but the interest rates are much higher. This is because those who invest in a peer-to-peer lending site assume most of the risk that banks or other financial institutions normally assume.
How big is the market for peer-to-peer lending?
In 2022, the global peer-to-peer lending market was worth $134.35 billion. This figure is projected to reach $705.81 billion by 2030.
How do you invest in peer-to-peer lending?
The easiest way to invest in P2P lending is to make an account on a P2P lending site and lend money to borrowers. The sites allow the lender to choose the profile of their borrowers, so they can choose between high-risk/high returns or more modest returns. Many P2P lending sites are public companies, so one can also invest in them by buying their stock.
Are there any legal regulations?
In many countries, soliciting investments from the general public is considered illegal. Crowd-sourcing arrangements in which people contribute money in exchange for potential profits are considered to be securities.
Securities offered by the US peer-to-peer lenders are registered with and regulated by the Securities and Exchange Commission (SEC). In 2016, the New York state sent "warning letters" to 28 peer-to-peer lenders to obtain a licence to operate unless they "immediately" complied with responses to demands to disclose their lending practices and products available in the state.
In the UK, the emergence of multiple competing lending companies has resulted in demands for legislative measures that institute minimum capital standards and checks on risk controls.
