PEER TO PEER LENDING - AN EMERGING INDUSTRY ACROSS THE GLOBE

Abstract

Lending has existed for thousands of years and lately it has been integrated with technology to create one of the most innovative financial products of recent times, a technology driven marketplace-lending platform, online peer to peer (“P2P”) lending. It is a platform of financial transactions that bypasses conventional intermediaries by directly connecting borrowers and lenders. It has seen tremendous growth since 2010. USA, UK and China occupy a major portion of this industry but now it is taking off in many other jurisdictions across the world. The primary benefit of peer to peer lending to entrepreneurs is the ability to raise capital. P2P lending spreads risk as the funding requests is filled in much smaller incremental amounts. Another benefit is the lower cost of capital and higher returns to investors as peer to peer lending provides a low cost alternative to channelling savings to the real economy, usually at rates lower than those attainable through traditional funding avenues as it provide an affordable option for raising capital. It can help in economic recovery by financing small and medium enterprises (SMEs) which are a key engine of economic growth and can contribute to job creation and economic recovery. There are various risks associated with peer to peer lending such as risk of default which is estimated around 50% according to IOSCO research department. Risk of platform closure is the major risk which investors bear compared to other types of investments. Despite the short life of P2P lending, there have already been cases of peer-to-peer lending platform closing leaving no data on contracts behind and resulting in 100% investment loss. Risk of fraud is also one of the major risks which cannot be ignored. Online nature of P2P lending also makes it vulnerable cyber-attack posing great threat. This paper has been completed in three stages which are summarized below: i. Stage-1: Finding and comparing models of P2P lending prevailing in different countries and suggesting a model for India. Peer to peer lending has three main business models: the client segregated account model, the notary model and the guaranteed return model. The major difference between the client segregated account model and the notary model is that in the latter a bank originates the loan unlike the former where the platform originates the loan. In guaranteed return model intermediary platform guarantees a set rate of return. Some Chinese platforms work on guaranteed return model. Most P2P platforms in U.K works on client segregated account model and in U.S. notary model is followed by majority of platforms. ii. Stage-2: Finding and comparing regulatory practices followed in different regimes. The regulatory regimes are dependent on jurisdictional choices in regulation. Currently there is no cross-jurisdictional harmonisation in the regulation of these industries. Peer to peer lending is regulated in five different ways which are: a) Exempt/ unregulated through lack of definition b) Platforms regulated as an intermediary c) Platforms regulated as a bank d) The US model: there are two levels of regulation, Federal regulation through the Securities and Exchange Commission (SEC) and state level, where platforms have to apply on a state-by-state basis e) Prohibited iii. Stage-3: Detailed analysis of loan amount funded via P2P platforms in countries like USA, UK, China and India. According P2PFA, the cumulative lending through P2P platforms globally, at the end of Q4 of 2015, has reached 4.4 billion GBP. Lending through P2P has grown dramatically from 2.2 million GBP in 2012 to 4.4 billion GBP in 2015. According to business insider US is the largest P2P lending market in the world by loan volume. In majority of countries like India, Spain, Denmark this market innovation has yet to develop substantially. The high growth rate in P2P lending means the industry could become a more mainstream investment opportunity but its interconnectedness could expose more of risks to the wider economy. Although this industry does not currently constitute a systemic concern, but if allowed to grow without proper management, then there is a possibility of it becoming an important issue, in a systemic context, in the future.