Tuesday, 19 January 2016

How peer-to-peer lending platforms are transforming the lending industry

Peer to peer lending (P2P lending) matches people who have money to invest with people who are looking for a loan. A more appropriate term for this practice is marketplace lending because an online platform, usually a website, is used to match investors with borrowers.


The origin of P2P lending can be traced back to the global financial crisis which paved the way for innovators. Heavy losses forced banks to scale back on riskier consumer and small business lending, as increased regulatory oversight and capital requirements made these loans less attractive to banks. Years of historically low interest rates, meanwhile, whetted investor appetite for alternative sources of yield.
Meanwhile, Big Data and improved analytics made it possible for tech-driven platforms to identify borrowers and make quick lending decisions. Where traditional lenders have to follow laundry lists of requirements to vet applicants, marketplace lenders are using propriety algorithms to make snap judgments.


Unlike the traditional financial institutions (like banks or NBFCs) P2P lenders can leverage low operating costs, Big Data and technology streamlined for a mobile generation to mediate terms between borrowers who want quick access to cash and the lenders looking for better yields.
Further, unlike a bank there are no capital requirements for P2P lenders to maintain thereby further reducing the costs of operations.


In the US alone, such marketplace loan origination has doubled every year since 2010, to $12 billion in 2014. Meanwhile, the trend is playing out globally, notably in Australia, China and the UK. In China, according to a report in China News, as of the end of 2015 P2P lending topped $150 billion or 982.3 billion yuan.  This is four 
times the amount facilitated by P2P platforms in 2014.

Demand being met

Currently, the most important category of loans that are being catered to, by P2P platforms, relate to unsecured consumer credit that includes consolidation of debt or personal loans – these categories generally constitute more than 50% of the total loans. But, as the popularity of the concept increases, overtime, student loans, auto loans and even housing loans might be catered to.

Indian Scenario
In India, the entire industry is at a nascent stage. While, there are some borrowers and lenders who have started taking advantage of the concept and started actively borrowing and lending on the platforms, the proliferation of the concept is yet to happen. As per the RBI, it is watching this sector; however, considering the quantum of lending through such system is very small, it might take some time before formal regulations come up for P2P lending.

As in the West and other developed markets, the day that P2P lending becomes a mainstream Alternative Finance source, in India, is not far away.

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