Developments in technology and web world are changing financial markets drastically. Digital transactions including mobile wallets are creating big challenges to traditional banking. One such challenge is the emergence of Peer to Peer (P2P) lending.
Peer to Peer lending is the practice of borrowing and lending of money among unrelated individuals and business entities, on the online platforms. The RBI in its consultation paper (on P2P, April 2016) defines P2P “It can be defined as the use of an online platform that matches lenders with borrowers in order to provide unsecured loans. The borrower can either be an individual or a legal person requiring a loan.”
The RBI also describes the associated features of P2P. “The interest rate may be set by the platform or by mutual agreement between the borrower and the lender. Fees are paid to the platform by both the lender as well as the borrower.”
Classification as well as regulation of peer to peer lending is in its infancy stage. The RBI in the consultation paper mentioned P2P as a form of crowd funding. Under crowd funding, small amounts of money from large number of individuals/organizations are raised to finance start-up venture, social activity etc., through web based platform. The P2P lending is carried out through the internet platfoms of the P2P lending companies. These companies charge a small commission for their services.
Most of the loans are unsecured (no collateral) small personal loans.
Peer to peer lending is known in many names. It is referred as ‘social investing’, ‘marketplace lending’ or ‘direct consumer lending’.
Since P2P is an online exercise, there are many challenges for the online firms including to convince the safety of the exercise to lenders. In advanced countries, peer to peer lending is growing at a good pace because of the advanced infrastructure and the spread of online activities there. In India, the Peer to Peer culture is yet to establish its foot though it is increasingly considered as a future threat to the traditional brick and motor banking industry.
RBI’s consultation paper is a beginning attempt to regulate Peer to Peer lending.