Alternate Lending business models have, by now, settled into the Indian financial demographics. These include P2P lenders, Marketplace Platforms and Digital lending. These aim at resolving specific credit needs of retail consumers and Micro and small businesses (“MSE”) that do not have a complete or any credit history thus remaining disabled from old school bank loans, e-merchants and even Non-Banking Financial Companies (“NBFC”).
The Peer-to-Peer lending business model is built around technology and the only permitted entity to run a Peer-to-Peer lending platform in India is a Non-Banking Financial Company. Owing to its technological platform, operational costs of old-school banks are avoided such as physical branch operating expenses, regulatory overheads, collections and recoveries needed to service aged loan book. This makes it cheaper and faster to access loans.
How it works?
In India, a P2P process has to include three types of participants, first being the lender(s), the borrower(s) and the Intermediaries. The Reserve Bank of India regulates the Intermediaries and the Intermediaries are self-regulatory and lay down norms for borrowers and lenders of their respective platforms. Typically, users register on P2P Platform as either borrower/ lender after a verification process undertaken by the platform. Thereafter the users are required to feed in answers to various questions to assist the platform to develop tailored profiles for them putting forth their risk appetite/ creditworthiness.
A borrower’s profile would disclose the amount needed, purpose as well as terms typically. A borrower can borrow from one or more lender. Similarly, the lender may fully or partially lend to one borrower. On reaching a consensus, a formal contract is signed by parties, which is followed by the transfer of funds to borrower’s account (escrow). repayments are made over the predetermined period of time.
P2P Business models
Within the P2P model, the lenders are typically individuals and households with surplus funds and savings who are seeking a better return. Two business models of P2P lending segment include the Direct Disbursal model (“DDM”) and Assisted Disbursal Model (“ADM”). In DDM, the platform, using algorithms, matches requirements of borrowers and lenders, similar to global practice. Under the current Regulatory Regime, RBI has placed the requirement for platforms to maintain escrow accounts for better monitoring and control. This allows for direct transfers of disbursement and repayment being routed through these escrow accounts. ADM sees tying up by platforms with field partner, typically being a local NGO or similar institution) and focuses on unsecured loans to the low-income household.
RBI norms are required to be adhered to by P2P platforms. They can be found here.
Comment: The norms need to be revised to address defaulted loans in the last financial year. basically, the Regulations need a review in that its effects, successes and pain points are detected.