PEER 2 PEER LENDING (INDIA) REPORT
Bank Management
Term V (2020-2021)
Indian Institute of Management, Calcutta
Compiled by:
Charu Rawat MBA/0334/56
Pulkit Sharma MBA/0371/56
Siddharth Bagaria MBA/0390/56
TABLE OF CONTENTS
1. Credit & Banking Business in India 3
History, Market conditions & Developments
2. Major Digital Trends 5
3. Major developments in Indian Lending industry 7
Open banking, Account aggregation & Digital lending
4. Introduction to Peer 2 Peer Lending 9
P2P lending, History, Pros & Cons
5. Business models & Benefits 13
Direct, Aggregated, etc.
6. P2P Market 16
Global, Asian & India
7. Regulatory landscape in India 19
Outlook, Developments
8. Opportunities of P2P Lending in India 21
Can P2P solve problem of credit in India?
9. Challenges 22
Key risks & challenges
10. Future Outlook & Recommendations 23
11. Reference 24
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CREDIT & BANKING BUSINESS IN INDIA
India is a diverse country with population 1.4 billion. Current credit market in India = 1700
billion USD with estimated market for digital lending to reach 1 trillion USD by FY2023.
Industry analysis:
Bank financing and non-bank financing
The current banking system cannot solve the problem of lending in India because of the
following reasons:
1. Lack of credit history of citizens
2. Population pressure – Not enough for all
3. Low transparency coupled with high NPAs
4. Weak legal resolution system
5. Poor asset quality
6. Unhedged foreign exposure
7. Lack of proper credit assessment tool
Lending value chain
Origination
Underwriting
Disbursement
Monitoring
Collection
After sales service
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▪ Origination: Origination includes the client sourcing and business development activities. It
includes meeting and convincing the client to avail our credit facilities. At this stage, the
agent also collects basic information about the customer, for further processing of loan
application. With the increased technology usage, this activity is being taken up by
technology platforms aided with chatbots.
▪ Credit underwriting: Once the documents and other information of the client is collected, it
is sent to the credit assessment team for validation of data provided. The credit team assesses
the customer’s creditworthiness based on different credit scoring model, usually unique for
each model. Technology helps in credit assessment by enabled faster validation of data and
uses historical data to determine the credit worthiness by automated self-learning models
which improves by itself over time.
▪ Disbursement: The amount of loan that can be disbursed and other terms of the loan are
determined with the help of credit scoring model. The same is communicated to the customer
for finalizing the deal. Certain institutions and types of loan may allow the borrower to
negotiate the terms of loan with the lender. Once the terms are finalized, the loan is signed,
and amount is disbursed to the customer’s account.
▪ Monitoring: The loan process does not end with disbursement of money. The most important
part of the business comes after disbursement, which is monitoring and collections. The
quality of loan or the credit worthiness of customers is dynamic and may change over a
period of time, therefore, affecting the quality of loans tendered. Thus, monitoring the loan
book is important until the loan is repaid completely. As the process of lending and
repayments goes on, monitoring becomes a continuous part of the process.
▪ Collection: Repayment of the loan disbursed comes in tranches over a period of time. Any
delinquency in repayments directly affects the quality of loan book and thus, the capital and
profits of the lender.
▪ After sales services: With increasing focus on customer service across industries, the lending
business is also focusing on after sales services. This includes easy access to documents and
statements, easy settlements, and early payment options. The firms having multiple products
also engage in cross-selling of products.
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MAJOR DIGITAL TRENDS
India is a developing economy with digital & internet developments at its nascent stage.
Despite this, the country is witnessing high growth in digital penetration and usage, aiding in
digitization of services like lending.
▪ Digital penetration: Digital penetration in India is increasing at a fast pace owing to
significant reduction in the cost of data consumption with 4G rollout.
▪ Content consumption
With a smartphone easily accessible to the Indian population and falling data cost has
boosted the content consumption manifolds.
Data Cost in Rs. Smartphone Cost
A 95% decrease in data cost and 1/3rd fall in smartphone cost has led to an eight-fold increase
in data consumption.
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▪ Evolution of technology
Technology is evolving at a rapid pace. The scale of technology has become infinitely big with
the processor and component size becoming infinitely small. A personal computer today is as
efficient as the super computers of 20th century.
▪ Trends influencing peer to peer lending market size
• Less operating costs and lower market risk to lenders and borrowers are the main factors
driving the growth of global peer-to-peer lending market size. Additionally, the adoption
of digitization in the banking sector adds transparency over traditional banking systems,
which in turn is expected to fuel the market growth.
• A growing student population that prefers loans at a lower interest rate is expected to
boost the growth of peer-to-peer lending market size. Additionally, increasing awareness
pertaining to clearing personal debt as soon as possible is another reason for increased
acceptance of the peer-to-peer lending market.
• The development of the Asia-Pacific market has led to an increase in the number of
lenders and borrowers across the country. And an increase in the number of small
business lending entities is expected to provide the peer-to-peer lending market with
lucrative opportunities.
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MAJOR DEVELOPMENTS IN INDIAN LENDING INDUSTRY
OPEN BANKING & ACCOUNT AGGREGATION:
Open banking refers to the concept of financial data sharing by third-party service providers
enabled through APIs.
Open banking can be adopted with 2 different models:
a) Regulatory driven model
b) Market driven model
Positives: Financial democratization, Capital efficiency, Operational efficiency
Social media
Ecommerce Insurance Electric and
companies companies power companies
Tax and other
Bank Telecom players
Govt. authorities
MSME Digital
Data Universe
Central Consent
Authority
Lender
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Cross-industry data segregation potential
Account Aggregation:
Account aggregation is an important aspect of the open banking ecosystem. Account aggregators
are the third-party service providers which enable segregation of financial data of clients from
different sources, made available to the lender for use.
India is moving fast towards open banking and account aggregation.
Timeline of developments around account aggregation in India
Digital Lending:
The growing digitization of services across the world has led to digitization of lending business
as well. India’s digital lending startups have a credit-ready and untapped addressable base of 120
Mn number of formally employed Indians without a credit card. Lending tech startups are
innovating with models such as sachet credit and buy now pay later products for the Indian
consumer. With over $2.4 Bn worth venture capital invested in Indian lending tech startups
between 2014 and Q3 2020, the investor outlook towards the sector also looks bullish.
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INTRODUCTION TO P2P LENDING
Peer 2 Peer Lending
Peer to peer lending is an arrangement where individuals or businesses can lend money to other
individuals or businesses directly without involving any financial intermediary. It is not limited
to borrowers known to the directly but allows to lend to/borrow from anyone listed entity on the
platform. With the advent of internet, the matching of lenders with borrowers is now being
enabled over online platforms, thus making it Digital P2P Lending. This helps promote direct
lending from person to person.
P2P lending first evolved as a concept in United Kingdom. Company named Zopa, started back
in 2012, introduced the concept of P2P lending formally, allowing lenders to choose whom to
borrow among the listed borrowers. The business majorly involves three parties:
▪ Lender: Any individual or small firm with surplus funds available can be a lender in Peer-to-
Peer lending. This fetches the lenders some extra return on the funds, which they might
would not have earned otherwise. In some countries like India and UK, institutional lenders
can also lend to borrowers through such platforms indirectly.
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▪ Borrower: Borrowers in P2P lending are usually individuals or small business firms with
poor or no credit history. The interest rates charged in this arrangement is usually higher than
term loan sourced from banks. Therefore, borrowers would prefer P2P loans only in case
there is some hindrance in procuring loan from formal sources of funds.
▪ Platform: The platform here enables the lender and the borrower to conduct business through
the platform. Platform may provide services like lender/borrower verification, credit
assessment, and validation check of borrowers. Though the platform conducts credit
assessment, usually the decision of whom to grant loans is reserved with the lenders
themselves. They can choose borrowers based on the borrower’s credit risk listed in different
categories. The lender based on his risk appetite and return expectations decide which
borrower should be given the loan.
Benefits:
P2P Lending is beneficial in providing credit to deprived, especially in markets with extremely
strong or extremely weak credit assessment and underwriting systems. For developed economies
with strong credit assessment, mediocre or weak profiles will not be able to avail loans from
formal channels. Thus, making P2P a preferred option. For developing economies credit is a
major source of funds, allowing the individuals to improve their business profits and living
standards. Credit availability from formal channels is inadequate to cater to high demand.
Therefore, person to person lending may lead to better utilization of idle funds making it
available to the individuals or businesses in need of funds. It leads to the following advantages:
▪ Higher returns for lenders: The investors with surplus funds with no avenue of earning
returns, may choose to lend directly to the borrowers earning handsome interest returns.
Saving the funds in banks is another option which might not generate negligible or negative
inflation adjusted returns.
▪ Catering lower customer tranches: Through P2P lending facilities, customers with no or
weak credit history will also be able to procure loans which is not made available by the
formal banking sector.
▪ Additional funds apart from banking sector: P2P lending has the potential to increase the
total pie size of the credit market in India. Person to person lending can fill the gap between
demand and supply in the Indian credit market.
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Example of P2P Lending:
Key Insights
• High origination/employee ratio - $7.8 m of loan origination per employee in 2019
• Low capital marketplace model - Only 23% of loans held by Lending Club itself.
• Started as a fintech marketplace for loans, gained access to ample data by managing
originationand underwriting, looking forward to providing full banking services
• Acquired Radius Bankcorp in February 2020, to expand portfolio of services and reduce
the cost of funds through bank deposits
• High sales & marketing costs leading to high Customer Acquisition Costs
• Focus on increasing Customer Lifetime Value (CLV) with 35% revenue from repeat
business
• High investments in technology leading to lower operational costs
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Business Model
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BUSINESS MODELS & BENEFITS
P2P lending business model has evolved since its advent in 2012. Initially, it started with
mapping of lenders with borrowers directly. Though the lending today takes place through
multiple business models.
CLIENT SEGREGATED ACCOUNT MODEL:
This is the simplest form of P2P model, where the lenders directly interact with the borrowers
and they themselves fix their counter parties.
The process of client-segregated accounts model is briefed below:
1. The borrower first puts in a loan request on the P2P site.
2. The loan request is then listed on the P2P website for the lenders to identify and act on the loan
request.
3. After successful identification and assessment of credit worthiness and various other factors
related to the borrower, the lenders then release the funds in favour of the borrowers, which are
deposited into a specific account called the Investor Sub-Account maintained with the P2P, there
is a separate investor sub-account for each and every client (lender and borrower).
4. Release of funds in favor of the borrower, is acceptance of the borrower’s request for the loan
5. These funds are then transferred into the Investor Sub-Account of the borrower for him to put
to use.
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6. On the remittance of the funds between the lender and borrower, the P2P usually deducts its
loan origination charges/ administration fee, fees charged for using the platform, by whatever
nomenclature it may be called, from both of the clients.
7. At time of repayment, the borrower repays the amount by depositing the same into its Investor
Sub-Account from where it travels into the lender’s accounts.
8. While these accounts are operated by the lenders and borrowers themselves usually, but the
information pertaining to flow of funds is routed through the P2P portal.
This form of P2P model is very transparent as both the parties have complete knowledge of flow
of funds. Here the lenders do not face any risk of losing their money in the event of bankruptcy
of the P2P company as there is a direct agreement between the lender and the borrower, neither
does the P2P faces any risk of claims from the lenders in case of default of the borrowers, as the
lenders use discretion for making lending decisions.
NOTARY MODEL:
This is a much complex form of P2P business, which involves a commercial bank apart from the
lender or the borrower.
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The process of the notary model is briefed below:
1. The borrower first put in their loan request on the P2P site;
2. The P2P then forwards the loan request to a commercial bank associated with the P2P, the
bank then sanctions the loan and issues a note promising to pay the debt to the P2P;
3. The P2P then forwards the note to the borrower;
4. The P2P then charges its fees from the borrower;
5. The borrower submits the promise note to the issuing bank;
6. The bank in return pays the promised loan amount to the borrower;
7. Meanwhile the P2P lists the loan request on its website, for the lenders to view them and
advance funds to finance the loan request;
8. Once there are sufficient funds with the P2P from the lenders, the P2P immediately buys the
loan receivables from the lending bank and issues certificates representing debt converted into
tradeable units to lenders in proportion to the funding extended by the lenders to the loan.
9. At this time, the P2P charges its administration fees from the lenders.
10. At time of repayment of the loans, the borrowers pays the lenders through the P2P.
Essentially the loan origination is through a bank which acts as a vehicle to convert the loan into
tradeable units which are then subscribed by the lenders on the P2P platform.
This form of P2P model is advantageous to the borrowers as they do not need to wait for a lender
to identify him/her and advance them loans, instead the P2P helps the borrowers by facilitating
the banks to originate the loans and later converting the loan into a P2P loan. This is the model
used by the industry leaders like Lending Club and Zopa.
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P2P MARKET
Global Market: Touching a global high of around £ 46,706 millions in terms of lending volume
in 201910, the P2P industry is showing no signs of stopping as it gears up to give banks a run for
their money (literally). The first ever P2P was Zopa. A U.K. born company established in 2005
that introduced this idea of raising funds from any common person around the world that had idle
money lying with him. United States, seeing the rise of such a business model, introduced
Prosper and LendingClub in 2006, two of the heavyweights in today’s scenario as well. China
too cloned this structure, with the P2P story mushrooming in the year 2007.
As per a research, conducted by S&P Global Market Intelligence, loan origination through P2P
in UK amounted to £5.7 billion in 2018. Further, AltFi reports12 annual lending of £6.17 billion
in UK in the year 2019.
The cumulative loan origination volumes grew at a CAGR of 175% between the first quarter of
2005, when Zopa Ltd. launched the industry into existence, and the first quarter of 2019.
Further, statistics show that, the global P2P Lending Market is valued at USD 34.16 Billion in
2018 and expected to reach USD 589.05 Billion by 2025 with a CAGR of 50.2% over the
forecast period, mainly led by China.
The marketplace lending (consumer) segment is expected to have 36,622.6 thousand users by
202313. The cumulative lending among P2PFA platforms has now exceeded 5.5 billion pounds
for businesses, and 4 billion pounds for consumer lending.
The lending volumes through P2P interface have been on a constant rise as also indicated by the
graph below:
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With a growth rate of 52% annually, P2P industry has a very promising future as Fintech is being
promoted and accepted worldwide. With the global economic scenario conducive to its growth,
the number of small enterprises and prospective investors looking for higher and customized
returns is only increasing. As internet penetration increases, the market size of the P2P players
will increase even further as prospective borrowers look for cheaper and much more relaxed
terms to raise funds. With every passing day the P2P industry seems to be improving as
companies pass more stringent terms and offer additional services to win over public confidence.
While the lending on the platform in percentage terms continues to be quite insignificant to the
size of the market, whether in the U.K or the U.S, and small in comparison to lending by banks,
but as illustrated graphically the volumes are on a rising trend world-over.
The P2P business has spread in various countries and is fast catching up in others. It accounts for
more than 70% of all crowd-funding activities worldwide.
The U.S. is the largest industry to date followed by China and Europe. P2P industry caters to
various avenues, credit to its wide and skilled investor base. Some of the most prominent fields
include small enterprises, student loans and auto loans.
Indian Market:
The P2P lending industry is in a nascent stage with no major regulations applied by the central
bank. The existing platforms leverage the network of retail investors and high net worth
individuals to disburse loans as the liquidity via the debt market or banks have been decreasing
over time. Currently poised at €1.7 trillion, the Indian economy needs to have a diversified
financial structure to drive financial inclusion (Patel, 2020). The Reserve Bank of India (RBI)
has linked the banking sector, non-banking financial institutions, and the unorganized financial
sector. Cumulatively, these account for 19.2% of the total lending with 10,000 players. Of these,
the P2P lending platforms provide an alternate option. Recently, the government has increased
the limit of loan disbursal amount through P2P lending to €50,000. Over the past decade, many
startups have emerged in this space. The increase in internet penetration is a prime driver for the
growth in this industry. Emerging economies such as India and Japan shall grow significantly
with alternate financing modes demanded by small businesses and individuals. According to
KPMG and NASSCOM, the FinTech industry in India is expected to cross €1.8 billion in 2020.
There is a growing trend towards digital payment systems among the urban middle-class post
introduction of the UPI (Unique Person Identity) system on digital payments. There is a growing
surge in the demand for loans at a lower rate, however it is difficult to obtain that. This demand
has led to a proliferation of few P2P lending platforms already. The current size of 2 Peer to Peer
lending in India is €20 million and is poised to grow up to €1 Trillion by 2023 at a rate of 25%
year on year.
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REGULATORY LANDSCAPE IN INDIA
Regulator Outlook & Developments
Reserve Bank of India included P2P lending under the category of NBFCs. The Reserve Bank of
India issued a Master Directions – Non-Banking Financial Company – Peer to Peer Lending
Platform (Reserve Bank) Directions, 2017 on 4th October, 2017, which is an extensive statement
outlining in detail the various rules and regulations that all existing and prospective entities
carrying on or intending to carry on the business of Peer-to-Peer (P2P) lending will have to
comply with.
Shortcomings/Issues
▪ Upper limit of ₹ 50 lakhs – Funds not available to large firms
▪ Issue redressal mechanism not stated and established formally.
▪ Negligible efforts from the government to encourage individuals to lend. Formal channel
funds diverted, and no new funds being made available.
Eligibility criteria
The basic eligibility criteria for carrying on the business of setting up a P2P lending platform are
as follows:
• Only a Non-Banking Financial company shall undertake the business of P2P lending
platform.
• All NBFC-P2Ps that intend to either commence or carry on the business of Peer-to-peer
lending platform must obtain a Certificate of Registration (CoR) from RBI.
• Every existing and prospective NBFC-P2P must make an application for registration to
the Department of Non-Banking Regulation, Mumbai of RBI.
• Any company seeking registration as an NBFC-P2P must have Net Owned Funds of at
least Rs. 2 Crores or higher as RBI may specify.
• The RBI has imposed the condition that the company seeking registration must be
incorporated in India and must have a robust IT system in place. The management must
act in public interest and the directors and promoters must be fit and proper.
SCOPE OF ACTIVITIES:
Do’s:
• Act only as an intermediary
• Ensure adherence to legal requirements applicable to the participants
• Store and process all data relating to its activities and participants
• Undertake due diligence of participants
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• Undertake credit assessment and risk profiling of the borrowers and disclose the same to
their prospective lenders
• Undertake documentation of loan agreements and other related documents
• Render services for recovery of loans originated on its platform
Don’ts:
• Not raise deposits
• Not lend on its own
• Not provide or arrange any credit enhancement or credit guarantee
• Not facilitate secured loans
• Not hold on its own balance sheet any funds received from lenders and borrowers
• Not cross-sell any products on its platform except for loan specific insurance products
• International flow of funds is prohibited
• Not release credit information
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OPPORTUNITIES OF P2P LENDING IN INDIA
Total credit Total credit Total private Potential in
requirement available household P2P
savings
The two keynote opportunities that can be capitalize on are:
a) To make liquid cash available at a cheaper rate to the middle-class segment of the
society. The average salary of a graduate student from college who has joined work in the
IT industry in India earns a mere €700 a month. In case of emergency situations or
marriage etc., he/she seeks a loan which is hard to get due to a lack of credit history.
Hence, he/she seeks a P2P lending platform where the seeker gets a loan at a 19% interest
rate which approximately would consume half the monthly salary thereafter.
b) An alternative investment tool for the middle-class. Uniquely poised, this business
will act as an instrument allowing the middle-class earner with an opportunity to make
money by depositing €100 of their regular income at a cumulative month on month
interest rate of 7%, marginally higher than the interest rates available on recurring
deposits in traditional banking systems.
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CHALLENGES
KEY CHALLENGES
▪ Customer adoption: Though person to person borrowing in India has been a common
practice since ages but lending to an unknown individual through a platform is something
difficult to incorporate in the lives of individuals in India. Adoption of P2P lending by
borrowers and lenders alike will be a key challenge for the industry & the regulator. Having
a network effect, the rate of growth of borrowers & lenders must complement each other.
▪ Credit assessment and underwriting: Assessment of borrowers’ credibility is a major
challenge because of two main causes. First, lack of holistic financial data in India makes it
difficult to conduct credit assessment holistically. Therefore, either the error of margin will
be high, or the process will be tedious. Secondly, P2P will witness more borrowers with weak
or no financial credit background, aggravating the issue of credit assessment & underwriting.
▪ Controlling unsolicited activities: As P2P lending is a fairly new concept enabled through
technology, controlling unsolicited activities through any such platform will be difficult for
the regulator. The conventional banking system has physical presence with periodic
monitoring. Monitoring and regulating P2P platforms remains a major challenge.
▪ Competition for formal credit sector: The formal banking sector gets a major share of its
lending capital from savings deposits made by the individuals and firms in the bank accounts.
Attracting private savings, P2P might turn out to be competition for the formal banking
sector. The challenge here is to promote inflow of more funds which is not present in the
banking system at present.
KEY RISKS
▪ Data vulnerability: P2P lending today is enabled through tech platforms, making it possible
to source funds easily from a geographically far-off place. But it also makes the users
vulnerable as a lot of user data is stored and used in the process. Financial data being highly
sensitive, data vulnerability is a major risk. The platforms must ensure that the data is stored
safely & not susceptible to theft or misuse. The enabler must prioritize data security above
other services.
▪ Fraud risk: As present in conventional financial system, fraud risk is present in Peer-to-Peer
lending as well. Despite monitoring and controlling measures, fraud might happen in certain
cases. Recovery here not solely being responsibility of the platform in most cases, it also
affects the efforts and effectiveness of recovery in platform based direct lending. Such risk
can be reduced by platforms through implementation of fraud detection systems. It will help
in early detection of fraud and signaling.
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FUTURE OUTLOOK & RECOMMENDATIONS
(Recommendations for process & system improvement in India)
• Allow tax exemption on income from P2P lending.
• Promote P2P lending through formalization.
• Formal ledger of peer lending
• Platform based lending will invariably gain huge momentum over the next three to
five years due to competitive interest rates and ease of making finance available.
• RBI may potentially exercise greater regulatory scrutiny of unsecured P2P lending
due to systemic nature of risks involved for end customers, wherein risk is higher if
loan underwriting is not robustly managed.
• Over a period of time, if unsecured P2P lending is well established, like in developed
markets, banks and institutional investors will potentially look to buy blocks of P2P
loans to add to their portfolios.
• With the increasing focus on automation and innovation in offering loan products to
lenders and borrowers, P2P firms may need to seek periodic assurance on the design
and operating effectiveness of their processes and internal controls from both a
business and IT perspective. This will ensure that data integrity of the platform is not
compromised at any given point in time, both externally and internally within the
firm.
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REFERENCES
1. https://cleartax.in/s/peer-peer-p2p-lending-india
2. https://www.pwc.in/assets/pdfs/ras/financial-services/compliance-cco-advisory-
services/banking/featured-publications/p2p-lending-in-india-a-new-wave.pdf
3. https://www.ibef.org/industry/bankingindia.aspx#:~:text=As%20of%20FY20%2C%20tot
al%20credit,as%20of%20October%209%2C%202020
4. http://vinodkothari.com/wp-content/uploads/2020/01/India-P2P-report-2019-2020-1.pdf
5. https://www.wirc-icai.org/images/material/ICAI-i2i-Funding-8218-updated.pdf
6. https://www.prnewswire.com/in/news-releases/peer-to-peer-p2p-lending-market-size-is-
expected-to-reach-usd-558-91-billion-by-2027-valuates-reports-893242811.html
7. https://www.lendenclub.com/future-of-peer-to-peer-lending-in
india/#:~:text=Future%20scope%20of%20P2P,all%20thanks%20to%20P2P%20platform
s
8. https://www.omlp2p.com/blog-details/peer-to-peer-lending-future-of-digital-loan-market-
in-india
9. https://blog.rupeecircle.com/the-rise-of-p2p-lending-in-india-and-its-future-prospects/
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