19/05/2020 - Indian Economy | Mainstorming

IAS Parliament 5 years

KEY POINTS

· In the current crisis of Covid-19, Reserve Bank of India (RBI) has created many windows for liquidity and banks are under pressure to lend.

· This is the right time to push for the peer-to-peer (P2P) lending platform, which has not taken off as yet. The P2P business model entails collection of money from individuals and lending to individuals as well as micro and small enterprises.

· The P2P platform can be a win-win for both borrowers and lenders. Credit-starved individuals and small business units can get money to restart their businesses and investors can earn higher returns.

· All loans are collateral-free. Till recently, for a borrower, the amount of a loan was capped at Rs 10 lakh; it is Rs 50 lakh now. The same threshold is applicable to a lender too. Like any other entities in the financial sector, P2P lenders need to follow the normal disclosure norms, report every quarter and are subject to RBI audits.

· The RBI has probably issued 20 licences so far but around a dozen have gone live in different metros. Being digital, some of them are lending and raising resources across India.

· The entire process is digital. The borrowers come online to the P2P platform, fill an online form, upload documents such as PAN, Aadhaar, income tax and GST returns and bank statements.

· The default risk of a borrower is taken by the investor but all avenues are available to a P2P platform to collect the money, including tele-calling, field collection, and even legal action. All defaults are reported to the credit bureaus to block the defaulter’s access to formal credit channels.

· This could be the right time to offer some incentives to the P2P industry at home. There could be tax incentives for individuals who lend in the P2P marketplace. They can be allowed to earn up to say, Rs 5 lakh a year tax-free income. This will encourage the savers to come forward and create the flow of credit.

Aradhana Tiwari 5 years

For the revival of Indian economy from COVID-19 attack, this is the right time to push for the peer-to-peer (P2P) lending platform as an alternative for investment across various firms, when banks are grappling with risk aversion.

>>> P2P business model and its key facts :

The P2P business model is an "FinTech model" , that entails collection of money from individuals and lending to individuals as well as micro and small enterprises.

It allows individuals and businesses to borrow and lend money to each other.

---> Key facts :

- "non face to face customers" concept is inherent to P2P lending.

- Credit scoring is one of the key value propositions offered by P2P platforms and the lenders will be relying on the credit scores assigned by the platform.

- The key drivers for the P2P regulations should factor in the financial literacy of the participants.

>>> Challenges :

- However, there is a moral hazard that makes this business need to be monitored. This threat begins with verification of the borrower’s data that is not appropriate.

- There is an information asymmetry problem in the risk assessment process. The unavailability of individual credit information affects the credit risk assessment.

- Thus, information asymmetry, determining borrower scores, moral hazard, investment decisions, regulations and policies, and feasibility of P2P Lending are the common problems identified in this platform.

>>> Conclusion :

The development of P2P Lending platforms, besides being an alternative for investment, allows the emergence of risks like cheating, money laundering, and even shadow banking.

Thus, for this reason, regulations such as RBI is expected to be able to formulate policies and rules before this business is declared feasible to operate.