Capital and finance have always been a sought after resource. They determine the odds of success and failure for a new upcoming business. For individuals, it could mean the possibility of making a long sought after purchase. The formal lending sector in the banking and finance industry is driven by credit ratings that determine the risk worthiness of an individual or business borrowing money.
The fall back of systemic evaluation for lending
The institutionalized approach to lending and borrowing is typically overwhelmed by a plethora of processes that end up inadvertently delaying the lending process and making it more of a hassle than a feature. Metrics such as credit scores also end up taking an overwhelming number of potential borrowers out of the financial system.
In the true sense, what was meant to be a safety mechanism results in a higher drop off from the lending market.
What P2P lending offers
In certain cases, a quicker disbursement of a loan or capital matters much more than a lower interest rate. The reasons could vary from a limited financial exposure to an aversion to complex paperwork. P2P or peer-to-peer lending simplifies the process of mapping and matching borrower and lender priorities and preferences through the use of technology.
In the true sense, P2P lending platforms function as a financial marketplace similar to an online commerce marketplace. Just like an ecommerce marketplace, sellers and buyers sign up and register for the service. While sellers offer goods, buyers seek attractive value for the purchases they intend to make.
The online marketplace then maps buyers and sellers based on a set of factors that would make it a profitable and convenient experience for both the buyer as well as the seller. A good example would be establishing the highest ranked seller who lives in the closest geographic distance from the buyer. This increases the possibility of the lowest shipping cost as well as higher satisfaction levels.
P2P lending operates in a similar way. When people with surplus financial reserves seek a return of their investment, they sign up as investors/lenders on a P2P platform. Similarly, lenders who seek operating capital for a new business need instant disbursement without complicated paperwork and procedural hassles; they could benefit by signing up on a similar platform.
Technology bridges the gap
The emerging industry of P2P lending continues to offer safe lending services by mapping appropriate factors such as credibility, worthiness and several other metrics but arriving at an instant decision. To do this, P2P lending platforms look at earnings, spending habits and arrive at a unique profile for each user. The average interest rate could vary anywhere between 10% to 28% for an average tenure anywhere between 3 months to 36 months.
The opportunity in P2P
Gaining expertise in P2P and emerging lending services will help boost professional prospects for emerging financial talent as well as mid-level leaders. More importantly, for new P2P lending platforms, risk management takes on a whole new meaning. The reason is that compared to traditional banking services, where investors are safe, the entire risk is borne by lenders in the case of P2P lending.
Being aware of regulatory requirements
The P2P lending industry in India is regulated by the Reserve Bank of India. Prior to providing P2P lending services, non-banking financial companies (NBFCs) must register with the RBI. They are also required to have funds worth at least Rs 2 crore while continuing to meet additional requirements laid out by the Reserve Bank of India. To ensure stability and security of the sector, the RBI has offered guidance that P2P lenders must keep their leverage ratio below 2.
In addition to these factors, regulations also cap the maximum loan amount taken by a borrower at Rs 10 lakh. Similarly, a single lender can only be exposed to a maximum of Rs 50,000 per borrower to ensure controllable risk. Additional regulatory specifications include doing away with guarantee and collaterals for borrowing.
Staying updated and succeeding with P2P
The Academy of Bankers will work closely with your team to educate them on understanding concepts, regulatory challenges and finer terms such as credit behavior and credit reports. We guide your P2P business and also conduct portfolio checks to help identify if your potential lenders were ever involved in banned transactions or could emerge as a high risk borrower that you must be vary of. In addition, we also train talent on how to effectively monitor portfolio and conduct due diligence for greater risk mitigation with your financial business.