We don’t need no banking system
This week, the RBI is expected to come out with concept
guidelines for peer-to-peer lending, which is one of the fastest growing
borrowing systems in the world. HT gives you a lowdown:
What is peer-to-peer (P2P)
lending? Where did it start?
P2P lending is the concept that links borrowers to many
individual lenders over online platforms circumventing the need for a bank. It
is called marketplace lending as it brings borrowers and lenders on one
platform.
This concept originated in the United Kingdom in 2005, with the
founding of Zopa, now one of the biggest P2P lenders in the world. P2P lending
gained prominence after the global financial crisis as banks became reluctant
to give out loans to individuals.
How is P2P lending different
from crowd-funding?
P2P lending is a type of crowd-funding, which relies on many
small individual lenders, who choose projects they want to invest in. In
addition, P2P lending carries interest rates and repayment clauses. P2P lending
is thus categorised as “lending-based crowd-funding” or “debt-based
crowdfunding”.
How does it work?
Suppose you want to start a new business and cannot convince the
banks to give you a loan of Rs 5 lakh. You log on to a P2P lending website such
as Lendbox or Faircent in India. You submit your proposal with the amount of
funds required, your expected rate of interest and the time in which you will
want to repay the loan.
Lenders registered on the website will be able to see your
proposal and will be able to chip in with amounts such as Rs 10,000. Your
probability of getting investors is higher if you offer to pay a higher
interest rate. On Tuesday, the average interest rate on Faircent was 23.32%.
P2P lenders net a commission on every transaction that take
place on their portal.
Why is it suddenly in the news?
Because P2P lending is unregulated in India and the recent case
of Chinese P2P lender Ezubao being charged with operating a “ponzi scheme” to
dupe 1 million investors has raised questions over how the sector can be
monitored.
After the recent monetary policy review Raghuram Rajan said
“there is a regulatory gap here (in P2P lending)”. He added that though volumes
were small they can expand quickly – similar to China where at least one scheme
has gone off track. “This impells us to move faster on this. Before they get
big, let us understand what needs to be done,” Rajan has said.
Is P2P lending unregulated
across the world?
No. The US was the first country to start regulating the sector
in 2008. By 2015 many developed countries including UK, Germany, Spain and
Lithuania had regulations in place. P2P lending is banned in countries such as
Japan and Israel, while it is unregulated in Brazil, South Korea and Egypt.
Regulations involve mandating reserve requirements for P2P
lenders to cover for default and capping of maximum size of loans.
After the Ezubao scam, China released draft regulations for P2P lending (Research: B Sundaresan)
Ezubao scam, China also released draft regulations for
P2P lending that required lenders to register with the government and disclose
all financials. The rules also sought banned the use of foreign funds by P2P
companies.
What are the issues with P2P
lending?
Securities and Exchange Board of India (Sebi) noted in its 2014
consultation paper on crowdfunding noted that “in P2P lending, there is no
investor protection to cover defaults” and “retail investors, who do not have
the capacity to absorb defaults, may lose significant proportions of their
investments”.
The issue of who will regulate P2P lending also persists. The
paper noted that since P2P lending does not generally involve direct issuance
of securities, its regulation may fall under the purview of RBI. The central
bank has meanwhile said that either it or Sebi will have to be the regulator.
This will become clear once the RBI issues its draft guideline on Saturday.
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