ET in the Classroom – Lending Without a Middleman

The concept of peer to-peer lending is fast gaining popularity in the West and has the RBI sit up and take notice. ET looks at this new trend which aims to cut banks out of the lending process

1. What is peer-to peer lending?
It is a new way of financing through which individuals can lend and borrow money without the need for a financial intermediary . Lenders with money to lend, and borrowers in need of cash can meet on an on line platform.

2. Why has it become popular, and what is the magnitude of funds loaned through this platform?
It is gaining prominence be cause it elimi nates the rigidity and time consuming proce dures of traditional fi nance. Lending and bor rowing can be done through the click of a mouse. In the US, there are dedicated websites, like e-commerce sites, for this kind of financing. A recent PriceWaterhouseCoopers report estimates such on line platforms issued loans worth $5.5 billion in 2014. It expects this mar

3. What are the risks in this form of lending?
Being a lightly regulated indus try, there is almost no assurance that the money lent will be recovered. Default risk is also high because many borrowers would likely turn to this platform only when their request for loans has been turned down by traditional financial institutions. Such high risk means that interest rates are also higher than traditional sources of funding. So it is a risky and expensive proposition for both lenders as well as borrowers.

4. How active is it in India?
Not formally , although one could argue that such an informal lend ing platform exists in India through non-bank sources like money lenders. This source of funding has also attracted the attention of the RBI, which said it is actively studying this arrangement and will release a discussion paper for public consultation. Deputy governor R Gandhi also warned about the potential risks of this new method of financing. “While recognising the need for innovative products, we should be conscious about the risks that may emanate out of such innovations.“

TEXT: Joel Rebello

Source: The Economic Times
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Author:

Neeraj; an entrepreneur & a visionary in the field of Railway, Defense & Automobiles, is a graduate in commerce and a Harvard Business School Alumni. He’s an expert in govt. liasoning & contracting and has an exceptional network & connections at both local as well as global level. He’s an expert in Market Strategy & Planning and has served number of overseas companies as an advisor/consultant. He takes a profound interest in upcoming startups & is very receptive towards ground-breaking ideas & innovations. He likes to brainstorm those ideas and if the values & philosophies matches; he is even ready to invest his resources, serve as a mentor or act as an incubator to futuristic businesses.

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