P2P LENDING

Abstract

Desperate times call for desperate measures. As technology continues to emerge bigger and better, it has also changed the way we book flights, or a taxi, or search for a hotel room outside, fintech continues to make massive transformation in the way flow of money and settlements of transactions happen. With the prevalent financial crisis in India during 2008, alternative

finance industry started taking shape. In the fast-changing landscape of Fin- tech, Peer to Peer (P2P) lending platforms has become a subject of interest as

well as importance because of the unique characteristics of this method of intermediation. P2P lending is a form of crowd funding where loans are sought through the various mediums of platforms from which people are willing to lend and borrow. These platforms act as a market place for borrowers and lenders in the virtual world and hence can be called a virtual marketplace. This advanced way of loaning caters to various individuals and small businesses by searching lenders within a time frame, without the need to provide collateral for obtaining loans. Self-employed persons, contract employees, persons with no regular jobs and borrowers with some black marks in their credit history may well be able to find lenders in the peer to peer lending space. Most of these loan seekers usually find it difficult to get loans from banks. In addition to this these platforms also enable consumers in the personal loan segment and petty businesses to borrow loans through them. P2P lending and crowdfunding have a few other names, including social finance, marketplace finance, and disintermediated finance. None of these terms and conditions are alone a prima facie description of peer-to-peer lending; P2P is indeed a bigger term indicating disintermediation of consumer finance using a social marketplace virtually. Alternative finance refers to financial channels, processes, and instruments that have emerged outside of the traditional finance system including regulated banks and capital markets. Crowdfunding and peer to peer lending are at the vanguard of this movement. The basic rationale behind emergence of this industry was removal of middlemen from the whole process of investment transaction, thereby reducing the cost and creating an online marketplace for the interested and potential investors and borrowers. This industry even includes the innovative and technical online instruments like cryptocurrencies such as Bitcoin, SME mini-bond and other shadow banking mechanisms. Crowdfunding platforms including the P2P Lending platforms in India emerged in around 2010. The number of these platforms grew without much regulatory and institutional oversight, which was encouraged also, by the general growth

of the apparent digital economy. In 2017, according to a survey the number of online platforms were estimated to be close to 50 and the outstanding loans sanctioned through P2P platforms was estimated to have reached more than 60 crore rupees (Care Ratings, 2017). While we study about these platforms and the industry, we also need to focus on how it ll be affecting the finance industry both banking and non-banking in the future. While there will be a new way of determining interest rates for these platforms, the risk and credit assessing methods will also see a new horizon for its determination. We cannot oversee the fact that traditional methods of lending have been solving the financial problems of the masses for long, hence to ensure the trust of the investors and continued service to those in need a careful analysis of both these factors are required and this paper therefore consists of two parts the first one dealing with the interest rates and what affects these rates in an alternate finance industry and the second one dealing with the credit risk that the investors face from the borrowers as there is no middlemen or any form of collateral involved in P2P lending cycle. This paper aims to analyse the factors affecting interest rates and the credit risk that the investors face while investing. This has been done by a regression and correlation analysis on various variables identified during the study and observation of the data available on the P2P lending online websites and platforms, providing the service.