Peer to Peer (P2P) lending is a decentralised form of money lending where people make direct loans to those in need of money. Hence, it is also known as social lending. History shows that P2P lending has been in use since the early 1700s, when the famous Irish author of Gulliver’s Travels, Jonathan Swift, lent small sums of money to those in need, to be repaid without interest! Throughout the 18th and 19th centuries, P2P lending became one of the most widely used money lending methods in Europe. And, although it became less popular in the 20th century as banks grew in influence, it’s recently boomed due to the internet.
With P2P borrowing, pretty much anyone can borrow from anyone.
Today’s P2P lending platforms sometimes allow borrowers to inform creditors about their needs and background in the form of an online profile. Digital P2P lending has grown in the UK since the launch of Zopa in 2005, an online lending platform that’s lent over £635 million to borrowers. Zopa was the first P2P lending platform to launch in the UK.
A turning point in the recent history of P2P lending was the bankruptcy of Lehman Brothers in 2008. As people lost confidence in traditional financial institutions and were no longer able to secure credit at a reasonable level of interest – P2P lending emerged as a viable alternative even in North America. Prior to the financial crisis, most people had exclusively used banks as a source of cash when in need. Houses, which had previously been used as security for a loan, lost much of their value, and institutional lending became far less accessible.
From 2007 to 2013, P2P lending in the UK grew from a margin activity into an industry with an expected £ 1bn in annual turnover in 2014. Nesta, a UK based innovation charity, found that 77% of companies that use P2P lending were “likely or very likely” to use it again.
The major benefits of P2P lending for individuals are:
- Lenders can enjoy returns that are several percentage points above those for a bank certificate of deposit; borrowers enjoy similar cost advantages compared with rates at a bank or credit union.
- Many individuals like knowing who they’re lending money to and why they need the money. Not only does it give them a sense of personal satisfaction, but they can also choose borrowers who they believe will repay the loan in full and on time.
- There’s a charitable aspect to the lending. If a potential borrower has a dodgy financial history but a sympathetic story to tell, a lender can willingly choose to forgo a higher return and/or assume greater risk to fund the loan.
- There can be a true sense of community at a P2P lender site. Forums tend to be active, and information is eagerly exchanged about lending and borrowing experiences. Proposed changes in the policies of the P2P lender are vigorously debated.
- Some people just hate banks and will do anything to avoid using them.
Considering the high appeal of P2P Lending among individual lenders and borrowers, it isn’t a surprise that P2P Lending is now China’s third most popular choice of investment for investments less than $77,500 as per iqianjin.com and AdMaster survey. Going by the reports, P2P platforms brokered about $150 billion (~INR 1 lakh crore) worth loans in year 2015 itself! The market has been growing multifold since its humble beginning in year 2010. Not only China, P2P Lending is big in the US, the UK, Germany and many more other countries and has been growing in leaps and bounds. The top two lenders in the US accounted for $18 billion of loans disbursed in 2015.
Key question for us – whether India is going to be next to witness such growth? By all means the answer seems to be a loud ‘yes’.
– Jaspal Singh (Borrower)
It is also worth mentioning that P2P Lending is currently largely unregulated in most of the countries including India. Due to its exponential growth in short time, the regulators did not get enough time to come up with right governance structure. The RBI has proposed to regulate the P2P business by attributing them the status of an NBFC. Several P2P platforms emerged since 2012. These include brands such as i2ifunding.com, lendbox.in, faircent.com, i-lend.in and lendenclub.com among others. We will consider the case study of i2ifunding.com:
Being founded and run by IIM alumni, catering to an exponentially growing pool of over 2000 clients from across India, i2ifunding.com is a market place for unsecured loans that can be used for multiple purposes such as consumer durables, debt consolidation (i.e. repayment of credit card debt etc.), medical expenses, education expenses, cash cycle optimisation and many more. The key highlights of how i2ifunding works are as follows:
Apart from providing end to end services, i2ifunding.com diligently evaluates the credit risk of each of the loan projects post which it assigns risk categories and recommends an interest rate for that project. The company uses a detailed credit profiling processes wherein it accounts for 40 parameters to arrive at credit score for borrowers.
– Avinash Omar (Investor)
i2ifunding.com also conducts physical verification of every borrower before the loan disbursal. The Innovative risk evaluation algorithm and best practices followed by i2ifunding.com have been the main reason for the company not witnessing a single default since its inception 10 months back.
i2ifunding.com is one of the very few p2p players that offer certain protection on the principal amount lent to borrowers. It has created a principal protection reserve for this purpose.
Due to these process, investors get an opportunity to earn higher ‘risk adjusted returns’ while the borrowers get an opportunity to get funded at the lowest cost possible as per their risk profile and market based demand
Indeed, i2ifunding.com champions the slogan “borrow easily, invest safey”.
Featured Image Credits: palo via Flickr