As a generation that collaborates, shares, and reinvents on a daily basis, peer-to-peer (P2P) lending helps weave in infinite and largely untapped resources. With the proliferation of new information technologies, peer-to-peer (P2P) lending is a method of borrowing or lending that is gaining momentum and slowly toppling the bank-centric model. Just like cab-hailing app Uber connects passengers to drivers, Airbnb connects private living spaces for travelers this form of lending connects various forms of borrowers with the lenders through the use of a technology platform.
P2P platforms connect borrower with an available lender on a virtual platform. The two parties deal with each other directly, If both the parties agree to a rate of interest and the amount to be disbursed, they can decide to enter into a contract. The platforms do the credit-scoring and make a profit from arrangement fees. As a result, the age-old reliance on middlemen such as banks and financial institutions has been removed from the equation, and both businesses and individuals can swiftly source unsecured loans with zero collateral for both personal and professional needs. While the lenders get a new investment option, higher returns, and periodic payments on the invested amounts, borrowers enjoy the benefits of lower interest rates, flexible loan amounts, and no prepayment charges.
In the recent years, the integration of AI and Machine Learning tools into the otherwise simple user interface platforms has paved the way for modern credit decision making processes that are analytical rather than merely reactive, introduced hassle-free paperless methods, brought in a new category of lenders equipped with credit decision making intelligence and expertise, reinvented the collection and recovery models, and has created an overall salutary effect on the lending landscape globally. In this fast growing financial model, P2P lenders have minimal regulations and leveraged low operating costs, and the use of Big Data and technology has brought in banks and institutional investors to streamline “marketplace lending” practices to generate the global reach and growth of both the investors and the borrowers.
The stringent policies of the traditional financial institutions had restricted more than one-third of the Indian population from securing a simple personal loan. The emergence of pioneering Indian P2P lending platforms such as Kiva.org, Rangde.org, Milaap.org, and Faircent.com, have created philanthropic or bottom of the pyramid (BoP) sector initiatives that target at helping the largely poor and unbanked population of the country. Their main focus is to cater to the increasing and substantial urban middle-class, both as a source of cheap credit and a lucrative investment option.
While this is only at a nascent stage in India, this mode of lending has been greatly accepted by the public, and the lending market is currently estimated at more than $4 million for P2P lending. The success of this model is driven by the need for a strong use case from the lender’s and borrower’s end. In some common instances, the investor with small funds around a lakh invests it in parts through P2P lending for an interest of 18% per annum return through P2P lending, while earlier they were only getting around 6% returns through fixed deposits. On the borrower’s end, individuals trying to source funds for their educational, medical, small business growth, etc needs are required to pay close to or more than 20% interest if they are able to secure a loan. When the funds are sourced through P2P lending platforms, these individuals pay only about 18% interest for any amount and zero collateral. However, this ease of transaction between lenders and borrowers is not without risk. More specifically, P2P investments like any other investment can go bad. The use of technology and integration with social media helps analyze a profile based on critical algorithms and helps to accurately predict risks with borrowers. And, in the case of an unforeseen default, legal processes can be pursued to save the investor from the risk of loss.