Peer-to peer (P2P) lending provides an alternative financing platform to borrowers and an investment avenue to people with surplus funds. Already a hugely successful model for alternative financing throughout the world, peer-to-peer lending is gaining traction in India at a rapid pace as well.

High operating costs at times make it difficult for traditional banks to diligently assess each customer’s risk profile. Therefore, retail loans (loans to individuals) get considered as 'flow' business, resulting in customers with varying credit quality getting bucketed together. This makes it unfair to borrowers with high credit quality and also leads to inefficient utilization of financial resources.

How do P2P platforms work?

There are two kinds of users for a P2P platform - lenders and borrowers. The platforms have their own system of determining the creditworthiness of the borrowers. They rely on a combination of the above system, traditional credit scores and other data, in helping the unbanked to get access to credit.

The expanding scope of P2P in collaboration with banks and financial institutions

- So far, P2P lending platforms have helped serve borrowers hitherto neglected or left untapped by the traditional financial framework of banks. P2P has fast gained traction owing to its better reachability, relatively lower overheads and competitive rate of interest notwithstanding faster processing and more flexibility offered to both users, making them an increasingly preferred choice.

- Making things better is the Reserve Bank of India (RBI) notification dated 4th October 2017 with effect of which, P2P platforms are to be treated as Non Banking Finance Corporations (NBFCs), providing them space in the institutional finance arena.

- While P2P lending platforms so far have their own systems in place to verify the creditworthiness of borrowers, they have also frequently relied on traditional credit scores. Now with their recognition as NBFCs, the P2P industry is further enabled to take credit records from formal credit bureaus and the investors on the platforms can make even more informed lending decisions.

However, the benefits are more of a two-way street:

- Not only will P2P platforms be able to use the credit information available with traditional, formalised lending sources but they will be able to help banks as well.
- Borrower information and credit score from P2P platforms can get shared and help build credit history.
- A better database being available to credit bureau can only help formalised sources.

The mutual give and take will help prevent defaulters from either system from entering the other. Regulations that currently only for loans of up to Rs 10 lakhs to be funded via P2P Lending platforms, may not make it seem as lucrative for banks to collaborate with these portals. But with the increasing growth the industry is seeing, a model where banks rely on P2P Lending platforms is not very far.

A potential collaboration between banks and P2P platforms in India could serve to be a rather disruptive idea as well. P2P platforms can be valuable to banks for the due diligence and research that they can provide them with at lower costs. In tandem, P2P lending platforms could become partner platforms for banks to cater to markets untapped by traditional lending bringing them higher revenue and wider reach.

Increased competition = Win for the customer

The recognition and credibility that the P2P industry derives as a result of the RBI notification, coupled with the benefits that such platforms provide both lenders and borrowers are likely to push banks to innovate and deliver better.

- With increasing returns for lenders, and competitive rates for borrowers, the banking industry is also likely to innovate to recapture lost ground.
- This should result in a win for the customers on both ends, but the P2P Lending industry will likely gain the most from this competition.
- With increasing awareness and reach, more users may flock to P2P Lending platforms and further fuel the industry’s growth.
- According to PwC, the estimated P2P lending to be generated in India over the next five years is pegged at 160 billion (five times its current size).